Information Frictions and Firms’ Trading Decisions: Evidence from the African Continental Free Trade Agreement (AfCFTA)

This project builds on a PEDL pilot grant awarded as part of the 2020 PEDL Young Scholars Matchmaking Workshop.

This project assesses the importance of an underappreciated potential barrier to international trade and firm growth: firms being uninformed about trade costs because they are unaware of trade agreements relevant to their sector. The researchers consider the case of the African Continental Free Trade Agreement (AfCFTA) and focus on Kenya. During their pilot study on 646 firms in Kenya, the researchers found that sizeable fraction of firms were unaware of the agreement (52%), even among larger (42%) and internationally active companies (46%). This project will therefore assess, through a randomised control trial, whether providing information about AfCFTA affects firms’ decisions to expand their international operations.

The project will employ a randomised controlled experiment (RCT) approach to assess the importance of information for firms' decisions. For the RCT, firms will be randomly invited to participate in a two-day, high-intensity, in-person training on AfCFTA. This training offers information about the trade agreement and gives firms’ representatives room to ask questions about the agreement. This RCT will be combined with a structural model of international trade. With this model the researchers will assess the overall importance of awareness of AfCFTA. By estimating an equilibrium with perfect information regarding the agreement, the researchers can estimate the total potential surplus resulting from a large-scale information campaign and can compare this to the cost of running such a campaign.

Given the considerable time and effort governments expend on negotiating international treaties such as AfCFTA, it is crucial that firms are aware of what has changed under the new agreement. This project will explore how the benefits of such agreements can be conveyed to the firms who are able to capitalise on new opportunities under the agreement. This project will also add a new dimension to the literature on information frictions and barriers to trade. Firms being unaware of trade costs has not been considered by this literature but is especially relevant to policy makers as they consider trade agreements such as AfCFTA.



Maximilian Huppertz

University of Michigan

Socrates Majune

University of Nairobi

Yewande Olapade

Federal Reserve Bank of Minneapolis