Antoine Gervais
University of Notre Dame

Uncertainty, Risk Aversion and International Trade

Posted in: Seminar
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Friday Oct, 6th 2017 03:30 pm 302 Sirrine
This paper develops a general equilibrium model of international trade in homogenous intermediate inputs. In the model, trade between countries is driven by uncertainty in the delivery of inputs. Because their managers are risk-averse, final good firms contract with multiple suppliers to decrease the variability of their profits. The analysis shows that risk diversification provides an incentive for international trade over and above such reasons as comparative advantage and economies of scale, and highlights a new channel – a reduction in uncertainty – through which trade can increase welfare. Econometric evidence reveals that the model is consistent with qualitative features of the data.