Economists have long suspected that the informational costs of trade are large; potentially as large as the better-studied transportation and regulatory costs. However, information is by its nature hard to observe, and so little is understood about the mechanisms underlying these costs, or even their true size. This study proposes to use international travel by African traders as an observable, costly information gathering device that will allow us to rigorously identify the type and size of informational trade costs.
The researchers propose that business travel may reflect three different information cost mechanisms: search for new trading partners, communication to specify the terms of contracts, and monitoring to prevent moral hazard by suppliers. In order to disentangle these mechanisms and their relative welfare costs, the team plans to create a panel data set covering travel and transactions by market traders in Lagos and then analyse this data set in conjunction with data on the characteristics of the traders’ Chinese suppliers and the cost of traveling from Lagos to China.
With a better understanding of the mechanisms underlying the information costs of trade, more attention can be put toward improving the flow of information. The most immediately relevant policies are likely to be those related to business travel – open skies agreements, visa policies, and so on. However, there is also a strong connection to export promotion and marketing efforts, monitoring and enforcement of international contracts, and cross-border financial intermediation. Without a better understanding of the underlying mechanisms, it is impossible to know which policy tools are likely to be effective in which context.