Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Sep, 2022, Volume 90, Issue 5

Volatility and the Gains from Trade

https://doi.org/10.3982/ECTA14411
p. 2053-2092

Treb Allen, David Atkin

Trade liberalization changes the volatility of returns by reducing the negative correlation between local prices and productivity shocks. In this paper, we explore these second‐moment effects of trade. Using forty years of agricultural micro‐data from India, we show that falling trade costs due to expansions of the Indian highway network reduced the responsiveness of local prices to local yields but increased the responsiveness of local prices to yields elsewhere. In response, farmers shifted their production toward crops with less volatile yields, especially so for those with poor access to risk mitigating technologies such as banks. We then characterize how volatility affects farmers' crop allocation using a portfolio choice framework where returns are determined in general equilibrium by a many‐location, many‐good Ricardian trade model with flexible trade costs. Finally, we structurally estimate the model—recovering farmers' risk‐return preferences from the gradient of the mean‐variance frontier at their observed crop choices—to quantify the second‐moment effects of trade. The simultaneous expansion of both the highway and rural bank networks increased the mean and the variance of farmer real income, with the first‐moment effect dominating such that expected welfare rose 4.4%. But had rural bank access remained unchanged, welfare gains would have been only half as great, as risk mitigating technologies allowed farmers to take advantage of higher‐risk higher‐return allocations.


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Supplemental Material

Supplement to "Volatility and the Gains from Trade"

Treb Allen and David Atkin

This zip file contains the replication files for the manuscript.

It also contains an additional supplemental appendix. These Supplemental Materials contain information regarding the empirical context of the data in Section 2, robustness related to stylized facts in Section 3, the derivation and estimation of the quantitative model in Section 5, and additional tables and figures mentioned throughout the main text. Please see the Online Appendix for the derivations, proofs, and extensions of the model introduced in Section 4.

 

Supplement to "Volatility and the Gains from Trade"

Treb Allen and David Atkin

This Online Appendix contains detailed derivations, proofs of propositions and extensions for the model introduced in Section 4 of the main text. Additional information regarding the empirical context of the data in Section 2, robustness related to stylized facts in Section 3, the derivation and estimation of the quantitative model in Section 5 and additional tables and figures mentioned in the main text are contained in the Supplemental Materials posted on both the authors' websites and in the replication files on the journal website.

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