Transparency and Risk Sharing in International Trade

Abstract

The paper examines the impact of uncertainty on the decision problem of an international firm. The uncertainty under which the firm decides on home and foreign supply is affected by an information system that conveys public signals about the random spot exchange rate. The transparency in the foreign exchange market is defined by the informativeness of the information system. Our notion of transparency thus proposes an information-based concept of uncertainty. In this setting, we revisit the link between the transparency in the foreign exchange market and the behavior of the international firm. While more transparency may lead to higher or lower domestic sales and foreign exports, we show that the firm's expected profits always go up. The welfare of domestic consumers, by contrast, may increase or decrease with higher transparency in the foreign exchange market.