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ABSTRACT:
Incomplete information in the international market creates difficulty in matching agents with productive opportunities and interferes with the ability of prices to allocate scarce resources across countries. Ties through international information-sharing networks or parent-subsidiary relationships overcome this matching friciton. When the difference between country factor-endowment ratios is small relative to the share of agents that is tied, efficient arbitrage and the standard properties of neoclassical trade models prevail. When the difference between factor-endowment ratios is sufficiently large, this equilibrium breaks down and countries become partially insulated from each other in the sense that the price (wage) of each country's immobile resource is more sensitive to changes in domestic than foreign supply and trade liberalization causes less convergence in relative resource prices. The model is applied to the debate over the impact of international trade on domestic wages, and extended to address whether ties can reduce world welfare through trade diversion and to compare the effect of ties on trade in differentiated versus homogenous products.

SUGGESTED CITATION:
J E. Rauch and Alessandra Casella, "Overcoming Informational Barriers to International Resource Allocation: Prices and Ties" (December 1, 2001). Department of Economics, UCSD. Paper 2001-18.
http://repositories.cdlib.org/ucsdecon/2001-18