The Real Effects of Information Frictions: "When the States and the Kingdom became United"
- American Economic Review (Forthcoming)
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 trans-atlantic
price difference fell after the telegraph, while average trade
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.
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