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This paper exploits a unique historical experiment to estimate how information frictions distort international trade: the establishment of the transatlantic telegraph in 1866. I use newly collected data on cotton prices, trade, and information flows from historical newspapers and find that the average and volatility of the transatlantic price difference fell after the telegraph, while average trade flows increased and became more volatile. Using a trade model in which exporters use the latest news about a foreign market to forecast expected prices, I estimate the efficiency gains of the telegraph to be equivalent to 8 percent of export value. (JEL D83, F12, F14, L96, N71, N73)
Claudia Steinwender (Wed,) studied this question.
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