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  3. American Economic Review
  4. March 2018
  5. Real Effects of Information Frictions: When the States and the Kingdom Became United

Real Effects of Information Frictions: When the States and the Kingdom Became United

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Abstract

This paper exploits a unique historical experiment to estimate how information frictions distort international trade: the establishment of the transatlantic telegraph in 1866. I use newly collected data on cotton prices, trade, and information flows from historical newspapers and find that the average and volatility of the transatlantic price difference fell after the telegraph, while average trade flows increased and became more volatile. Using a trade model in which exporters use the latest news about a foreign market to forecast expected prices, I estimate the efficiency gains of the telegraph to be equivalent to 8 percent of export value.

Citation

Steinwender, Claudia. 2018. "Real Effects of Information Frictions: When the States and the Kingdom Became United." American Economic Review, 108 (3): 657-96. DOI: 10.1257/aer.20150681

Additional Materials

JEL Classification

  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • F12 Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
  • F14 Empirical Studies of Trade
  • L96 Telecommunications
  • N71 Economic History: Transport, Trade, Energy, Technology, and Other Services: U.S.; Canada: Pre-1913
  • N73 Economic History: Transport, Trade, Energy, Technology, and Other Services: Europe: Pre-1913