The role of information transmission and services liberalization in international trade

Anca Diana Cristea, Purdue University

Abstract

This thesis consists of two essays that explore the importance of information transfers in international trade and the effectiveness of policy measures designed to improve connectivity across export markets. ^ The first essay provides theory and evidence for the role of information as an input to international trade. It formalizes an exporter's decision to acquire knowledge about foreign markets as a way to boost foreign sales. Information is modeled as an endogenous fixed cost of trade that is chosen by heterogeneous producers and used as input into market-specific product appeal. I show that differences in goods' information intensities, bilateral communication costs and foreign markets' potential determine the optimal level of information transmitted within a trade relationship. Using U.S. data on international business class air travel as a direct measure of information transfers, I test the model's predictions by estimating the responsiveness of bilateral air travel demands to variations in the volume and composition of U.S. manufacturing exports. Exploiting only differences across U.S. states in travel and trade flows by country and time, I find that conditional on air travel costs an increase in the export volumes significantly raises the demand for business air travel, and this effect is magnified by the share of differentiated goods in the composition of trade. From industry level analysis, I find that the estimated information intensities of trade are correlated with industry R&D shares and with measured contract intensities, confirming the insight that exports of innovation-rich manufactures and goods facing contractual frictions are most dependent on personal meetings. ^ The second essay investigates how policy can serve as a tool to improve connectivity across markets by opening up trade in service sectors. Using detailed U.S. data on international air passenger transport along with information on the signing of Open Skies Agreements, I examine the effects of trade liberalization in international air services. Exploiting within market over time changes in air passenger flows and comparing the average growth rates for liberalized versus protectionist countries I find significant positive effects associated with Opens Skies Agreements. Decompositions by intensive and extensive margins identify the channels via which industry output grows to the post-liberalization level. Further investigations using ticket level data and a system of demand and supply equations specific to each country pair and aviation route show that Open Skies Agreements generate significant reductions in air fares, and conditional on prices, lead to sizeable growth in air traffic. I also bring evidence of significant network effects that ‘spill over’ the gains from liberalization to consumers in restricted markets.^

Degree

Ph.D.

Advisors

David L. Hummels, Purdue University.

Subject Area

Economics, General|Transportation

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