Presenter: David Argente, Penn State University
Abstract: This paper explores the role of information externalities in the process of importing final goods. Leveraging data on imports by individuals in Costa Rica and on individual-level networks, we develop a new instrument to study how the likelihood of an individual acquiring a specific foreign product depends on whether peers in her relevant network had recently purchased the same product. A foreign product purchased by a close neighbor, a co-worker, or a friend increases an individual’s own demand for the same product, and especially so if the product is a differentiated good. This increase in demand can also trigger a response from retailers who are exposed to the product via their clients, in the form of firms increasing (decreasing) the likelihood of importing this specific product shortly after observing it is being heavily (lightly) imported by individuals. This is a new channel through which retailers learn about the level of the local demand for foreign products. These externalities suggest that the gains from trade may be larger than previously documented, especially in developing countries or remote markets where information frictions are acute.