Information Frictions, Internet and the Relationship between Distance and Trade; Memo 01/2018

This paper studies how and why the adoption of information communication technology (ICT) affects bilateral trade flows. The context is a public program in Norway which rolled out broadband access points leading to plausibly exogenous variation in the availability and adoption of broadband internet by firms. We find that broadband internet makes trade patterns more sensitive to distance and economic size, and show that these results are consistent with a model of international trade with variable elasticity of demand and information frictions. Our findings shed light on the so-called “distance puzzle” in international trade.