Joint with Martin Rotemberg


When acquiring information about potential buyers is costly, sellers will be unable to make the best possible match. We capture the consequences of this in a model where producers make investment decisions anticipating their future response to search costs. When one good has higher information frictions than another, decreasing those frictions increases production of that good along the extensive and intensive margins, and with specialization constraints production of the other good will decrease. Using a novel dataset on the roll-out of free postal delivery in rural communities in the US at the turn of the 20th century, we find evidence in line with the predictions of the model, as investment in manufacturing significantly increased in counties which got more free delivery routes, and agricultural investment weakly decreased. We use newspaper subscriptions as a proxy first stage, finding that access to new post office services did increase newspaper circulation. We also extend our basic model to show how cheaper communication can lead to the dispersion of production and consumption, an effect which is magnified by access to cheaper transportation, and find support for this prediction as well.