Information Friction Research Articles

The Role of Social Networks in International Trade and Economic Development

In an era of global trade, cultural differences and trade barriers persist, impacting international business transactions among companies. However, research has revealed that individuals within the same social network, regardless of their physical location, experience a mitigation of information asymmetry. This, in turn, facilitates the establishment of robust cross-border business relationships and enhances the efficiency of international trade. This effect is particularly pronounced among immigrants, who often maintain social networks that bridge cultural gaps and foster social connections. Such networks can markedly amplify the volume of trade for businesses. Moreover, these social networks play a pivotal role in facilitating market entry. Sharing a common social network serves as a trust-building mechanism in cross-border trade, enabling enterprises to share transaction risks and decrease the unpredictability of transactions. The study integrates the latest research on the pivotal role of social networks in global business. The findings demonstrate that ethnic networks, such as those formed by Chinese immigrants, significantly enhance trade volumes, particularly in product categories with high information asymmetry. Greater levels of social connectivity within these networks are associated with substantially higher bilateral trade volumes, especially for goods facing significant information friction. Immigrant networks serve not only as economic connections but also as cultural and social conduits crucial for promoting international trade. In conclusion, social networks mitigate information asymmetry and facilitate rapid expansion into overseas markets for businesses. They also optimize supply chain management by monitoring market dynamics and consumer feedback in real time, while clearly identifying market opportunities.

IMPACT OF SOCIAL CONNECTEDNESS ON FOREIGN INVESTMENT CAPITAL: EVIDENCE FROM ASIAN COUNTRIES INVESTING IN VIETNAM

This study examines the correlation between foreign direct investment (FDI) inflows from Asian countries into Vietnam from 2010 to 2022 and social networks, as indicated by Facebook friend relationships (Social Connectivity Index, or SCI). The empirical results demonstrate that social connections significantly impact FDI inflows, suggesting that these linkages are crucial for reducing information friction and attracting foreign capital to Vietnam. These findings remain robust across various model specifications, including year-fixed effects and other known FDI determinants.

Causal effects of information friction on willingness to pay for hurricane-resistant buildings

We investigate the causal effects of information provision on willingness to pay (WTP) for precautionary building standards. In a randomized stated preference field experiment, we present video evidence that hurricane-resistant building standards outperform traditional building standards to a random sample of homeowners. Our analysis reveals evidence consistent with causal effects of video information on WTP for hurricane-resistant buildings. Overall, alleviating performance information friction increases WTP by $634 on average and three times more among risk-neutral homeowners if the WTP payment card range is not truncated.

Ranking occupations by their proximity to workers’ profiles

Information friction makes it difficult for job seekers to find new employment opportunities. We propose a method for providing individual-specific occupation recommendations by ranking occupations based on their proximity to the worker’s profile. We identify a set of twelve skills, abilities and work styles that capture the worker-oriented requirements of all occupations and discuss how to measure these items using online questions and tasks. We use the Euclidean distance between the measured items pertaining to a worker and the requirements of an occupation to measure the proximity between job seekers and occupations. We show that the proximity between job seekers’ profiles and their preunemployment occupation predicts their intention to change occupations, thus suggesting that our method captures a meaningful conceptualization of mismatch. We also show that our method generates recommendations that differ from the previous occupations of mismatched job seekers, thereby potentially expanding their search scope.

Mechanical modeling of friction phenomena in social systems based on friction force

Friction is not an inherent attribute in natural science. Indeed, there are various friction phenomena present in social systems. In this study, the researchers developed the general concept of social friction and distinguished the two-dimensional structure of explicit-implicit social friction phenomena. Specifically, explicit friction includes institutional friction, economic friction, behavioral friction, and migration friction. Implicit friction includes cultural friction, cognitive friction, interpersonal friction, technological friction, and information friction. Physical theories such as friction force, classical mechanics, and functional principles have been introduced to construct a social friction force model. This paper describes the emergence and evolution of social friction phenomena from the mechanics perspective and clarifies the various characteristics of social friction force in different areas. This study also provides a new theoretical perspective for examining social friction phenomena and adds innovative content to intersection studies in physics and the social sciences.

Partially directed search in the labor market

I study the labor market implications of an equilibrium search model with flexible degrees of information availability, which nests the random and directed search models as special cases. Workers have limited information about the payoffs of applying to different firms. Firms use wages to attract workers and mediate externalities among applicants. Limited information interacts with the allocative role of wages, leading to new predictions. Reducing information friction has non-monotonic impacts on efficiency. When the cost of acquiring information is low (high), alleviating the information friction reduces (exacerbates) the distortion in the market equilibrium. I then apply this model to discuss the implications of improvements in information technology and the spillover effects among workers in the labor market.

Household Consumption and Dispersed Information

By introducing an information friction to a heterogeneous agent model, we are able to explain two patterns of small economies experiencing large income changes: (1) excess volatility in consumption and (2) household consumption elasticities that have low correlation with income. With a standard dispersed information structure, households cannot distinguish aggregate income shocks from idiosyncratic ones. Their consumption responds excessively to aggregate shocks, which they incorrectly forecast to be too persistent. This effect occurs homogeneously across the income distribution, lowering the correlation of the consumption elasticity with income. We corroborate our central mechanism using survey data on household expectations of their future earnings.

What can analyst forecasts tell us about imperfect information?

We used two imperfect information models, taking analyst as representatives of informed investors, quantifying the potential information constraints of the financial market and different companies, and found that China's financial market has more serious information friction than the United States, which means that people update the information set every seven to eight months on average or people's weight on new information is only 0.37. At the same time, we also found evidence consistent with cognitive constraints or rational inattention theory, that the more volatile a company's and industry performance, the slower analysts are to respond to that company's information.

Why cash grants fail to raise household investment in child education in developing countries

AbstractThis study formulates a theoretical framework to shed light on why cash grants fail to increase parental investment in child education, and what can be done to address the issue. The paper asserts that consumption vulnerability, loss aversion, and information friction render lump‐sum cash grants ineffective. Redesigning interventions as demand‐side cost‐sharing schemes would nudge parents to buy educational materials for their children.

Does Economic Literacy Affect Inflation Expectations? An Experimental Survey Approach

This study investigates the effectiveness of the information treatment in the inflation expectations on individuals with varying levels of economic literacy. In this regard, we conducted an experimental survey that provided participants with information related to inflation and other macroeconomic variables. The study reveals that the information treatment was effective in assisting the participants revise their expectations closer to actual inflation. Notably, this was especially effective for those without an economics background as they revised it to align with the actual inflation. Additionally, we found that formal economics learning is insignificant in the formation of inflation expectations given that the relevant information is accessible. Results of the study shed light on the importance of addressing information friction, focusing on financial education and effective communication from central banks.

Moderating noise-driven macroeconomic fluctuations under dispersed information

Can aggregate noise shocks produce large macroeconomic fluctuations, and if so, is there anything that policymakers can do about them? Yes and yes, if news about idiosyncratic fundamentals is contaminated by aggregate noise. I study a business cycle model where agents with rational expectations receive noisy signals about future productivity. The model features dispersed information, which allows aggregate noise shocks to produce frequent large fluctuations in the capital stock. Because of the information friction, a policymaker with an informational advantage can improve outcomes. I consider policies that affect investment incentives by distorting the intertemporal wedge. I calculate the optimal policy rule, and find that policymakers should discourage investment booms after aggregate news shocks.

Impact of fast internet access on employment: Evidence from a broadband expansion in China

This paper investigates whether and how broadband internet development affects employment in China. The temporal and spatial variations in Broadband China Strategy implementation allow for applying a staggered difference-in-differences (DID) to identify the intention-to-treat effects of the increased availability of broadband on labor market outcomes. Robust results show that broadband internet development will not affect the employment rate for low- and high-skilled workers. Furthermore, broadband internet development improves low-skilled workers' contract signing, pension, and medical insurance participation by 11.5%, 17%, and 19.8%, respectively but has no significant impact on high-skilled workers. Potential mechanisms can be divided into two aspects. At the micro level, broadband internet development mitigates information friction and increases the probability of online learning for low-skilled workers. Meanwhile, at the macro aspect, adopting broadband Internet enhances firms' productivity where low-skilled workers are most concentrated (manufacturing industry). The heterogeneous results suggest younger and rural workers benefit more. Our findings have great significance in eliminating concerns about broadband investment in developing countries.

Pricing, issuance volume, and design of innovative securities: The role of investor information

This study investigates the role of asymmetric information for the pricing, issuance volume, and design of innovative securities. By analyzing the information that structured product issuers provide to the investors of those products, we can identify specific sources of asymmetric information between the issuers and investors in this market. We show that issuers exploit this information friction to offer products to investors that appear more profitable for the issuer. In addition, we find that the friction induces issuers to design products with higher information asymmetry. Our results suggest that product issuers’ behavior increases information frictions in the financial system.

Bayesian Contextual Choices Under Imperfect Perception of Attributes

Classic theories show that choices can be represented by a stable utility function when they satisfy consistency axioms, such as transitivity and the independence of irrelevant alternatives. Empirical choice data, however, display several contextual choice effects that violate these axioms. We study a choice model with a fixed underlying utility function and explain contextual choices with a novel type of information friction: the agent’s perception of the options is affected by attribute-specific uncertainty. Under this friction, the agent learns useful information when the agent sees more options. Therefore, the agent chooses contextually, exhibiting intransitivity, joint–separate evaluation reversal, the compromise effect, the phantom decoy effect, the attraction effect, and the similarity effect. Because the uncertainty is attribute-specific and common across alternatives, the classic axioms hold when the alternatives dominate one another in attributes. This paper was accepted by Dmitri Kuksov, marketing.

Financial Literacy and IPO Underpricing

AbstractUsing an international sample of IPO firms and two country-level measures of financial literacy, we find strong evidence that financial literacy is negatively associated with IPO underpricing. In cross-sectional analyses, we find that the effect of financial literacy in reducing IPO underpricing is more pronounced when the information environment is less transparent. Employing path analysis, we document that information friction, firm transparency, and stock market participation are mechanisms that mediate this relationship. Our study contributes to and extends the literature by providing strong evidence that citizens’ financial literacy has an important and consistent influence on IPO underpricing.

It Pays to be big: Price discrimination in maritime shipping

We explore theoretically and empirically the within-route price discrimination in liner shipping and condition it on the market density. Our simple model with informational frictions predicts carrier price discrimination against smaller importing firms under the condition that the number of available carriers on the route is sufficiently large. Using transaction-level data from over 200 Chilean import port-to-port routes, we confirm our theoretical predictions and demonstrate their robustness and economic significance. Ranked by their annual importing size, importers in the 10th percentile pay 18% higher freight rates than importers in the 90th percentile, but only on routes with more than three carriers. Our results indicate that reducing market power distortion in the upstream sector (transportation) may amplify the informational friction distortion and price discrimination in the downstream sectors (importing industries).

Search, Information Friction, and the Housing Market

Search, Information Friction, and the Housing Market

Mutual fund herding and audit pricing

This study investigates how investor trading behavior affects audit pricing by examining mutual fund herding in specific. When mutual fund managers herd due to information cascade, mimicking incentive, or agency problem, it causes information friction and weakens their monitoring effectiveness. Heightened governance risk is associated with higher audit risk and thus higher audit pricing. In our empirical tests, we find that herding weakens mutual funds’ information advantage and monitoring effectiveness, ultimately resulting in higher audit fees. To mitigate the endogeneity concern, we employ the natural experiment of the 2004 SEC regulation change on mutual fund disclosure frequency to capture exogenous change in herding intensity. Our findings are robust using propensity score matching method and alternative measures. Consistent with our conjecture, we document that firms facing stronger mutual fund herding are associated with deteriorated corporate disclosure quality.

Bilateral capital flows: Gravity, push and pull

AbstractUsing bilateral capital‐flow data from 10 advanced reporting economies, with over 186 bilateral country pairs, from 2000 to 2016, this paper provides evidence of the significance of gravity factors, such as information asymmetries and economic ties, in explaining cross‐border bilateral financial‐asset flows. In addition, this study offers new evidence of regional contagion, with bilateral capital flows decreasing more for pairs of countries with closer geographic proximity (or with less information friction) than for those that are farther apart when global risk aversion rises. These findings have policy implications for the importance of information frictions, bilateral trade ties and regional cooperation in determining the level of bilateral financial‐asset flows.

Foreign ownership and liquidity: evidence from a frontier market

PurposeThis study aims to provide empirical evidence on the impact of foreign share ownership on the liquidity of the Tunisian Stock Exchange (TSE).Design/methodology/approachThe authors hypothesize in the first strand that stock liquidity could be positively affected by foreign ownership based on the real friction channel. The authors then hypothesize in the second strand, based on the information friction channel, that foreign ownership's impact on stock liquidity could be insignificant or negative and that foreign investors raise the level of information asymmetry. A sample of 318 firm-year observations from Tunisia over the 2012–2017 period and a random-effects estimation were used. Moreover, using the 2SLS estimator, a robustness check framework was applied in order to address any potential reverse causality concerns.FindingsThe authors find strong evidence that higher foreign ownership improves stock liquidity. More specifically, firms with higher foreign ownership engender a lower bid-ask spread, a better stock ability to absorb a large amount of trading volume, and a larger depth. These findings are still valid when reverse causality concerns are addressed through the use of the 2SLS estimator.Originality/valueThe paper contributes to the existing literature by focusing on the ownership–liquidity relationship on a frontier market. It provides further empirical support that higher corporate governance quality reduces the information asymmetry problem and enhances stock market liquidity.