Uncertainty and Trade Elasticities

Erick Sager and Olga A. Timoshenko

Abstract

Incomplete information makes trade more elastic. When firms face uncertainty about demand, selection into exporting occurs based on productivity alone. In contrast, with complete information firms can condition export decisions on both productivity and demand. The difference in the information available to firms alters the value of trade at the extensive margin. We show that the identification of trade elasticities with incomplete information requires quantity data, while trade elasticities in complete information economies require sales data. Using Brazilian export data, we quantify trade elasticities in models with and without uncertainty, and find that the elasticities are larger under uncertainty. This gap increases when demand is more uncertain.