Volatility and the Gains from Trade

Treb Allen, David Atkin

NBER Working Paper No. 22276
Issued in May 2016
NBER Program(s):Development Economics, International Trade and Investment

By reducing the negative correlation between local prices and productivity shocks, trade liberalization changes the volatility of returns. In this paper, we explore the second moment effects of trade. Using forty years of agricultural micro-data from India, we show that falling trade costs increased farmer's revenue volatility, causing farmers to shift production toward crops with less risky yields. We then characterize how volatility affects farmer's 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' unobserved risk-return preferences from the gradient of the mean-variance frontier at their observed crop choice—to quantify the second moment effects of trade. While the expansion of the Indian highway network would have increased the volatility of farmer's real income had their crop choice remained constant, by changing what they produced farmers were able to avoid this increased volatility and amplify the gains from trade.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


A non-technical summary of this paper is available in the July 2016 NBER digest.  You can sign up to receive the NBER Digest by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w22276

Users who downloaded this paper also downloaded* these:
Tintelnot w22236 Global Production with Export Platforms
Waugh and Ravikumar w22147 Measuring Openness to Trade
Kehoe, Pujolas, and Ruhl w22514 The Opportunity Costs of Entrepreneurs in International Trade
Keller and Utar w22315 International Trade and Job Polarization: Evidence at the Worker-Level
Cherniwchan, Copeland, and Taylor w22636 Trade and the Environment: New Methods, Measurements, and Results
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us