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INFORMATIONAL TECHNOLOGY & INTERNATIONAL TRADE.
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Assesses impact of applying information technology (networking, centralization) to global trade, using Pareto Criterion (relating equality of opportunity & economic efficiency).... More...
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Paper Abstract:
Assesses impact of applying information technology (networking, centralization) to global trade, using Pareto Criterion (relating equality of opportunity & economic efficiency).
Paper Introduction:
PARETO EFFECTS OF THE APPLICATION OF INFORMATION TECHNOLOGY TO INTERNATIONAL TRADE
Abstract
Information technology has been and continues to be applied in a wide range of economic activities. Most frequently, one hears only of the benefits associated with the application of information technology in some specific industry or to some particular economic process. Costs, however, also are associated with the application of information technology, although such costs may not outweigh the benefits of such application or even cause disequilibrium and dislocations over long periods. The purpose of this research was to assess the contention that the application of information technology to the process of international trade leads to Pareto Optimality. The finding
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Thisarrangement is labeled here as quasi-centralized (Flood, 1991, p. The Pareto Criterion Economic efficiency is defined as an allocation of resources in such away that it is not possible to change the allocation is such a way thatsomeone is made better off without anyone being made worse off by theallocation (Ekelund, & Hébert, 1991, p. Temporal consolidation canaffect the performance of a market. Although it would bepossible in principle for foreign exchange brokerage books to be fully openfor public inspection, in practice only certain orders are revealed tomarket-makers, while the others remain concealed. Inter-firm networks:Antecedents, mechanisms and forms. Latin Finance, (7 ), TF24-TF27. B., Jr., & Hébert, R. 427). "Whilethe communication of price information is a central function of securitiesmarkets, the fact that the systems of price communication in the foreignexchange market are not fully centralized suggests that these systems donot represent a cost-minimizing arrangement" (Flood, 1991, p. The purposeof this research was to assess the contention that the application ofinformation technology to the process of international trade leads toPareto Optimality. Ekelund, R. Trade adjustmentassistance and Pareto gains from trade. One may conclude that the application ofinformation technology to the process of international trade iseconomically efficient within the context of the Pareto Criterion, however,only if it can be demonstrated that no one suffers a loss from suchapplication. The Pareto criterionrequires that someone be made better off while no one is made worse offbefore an action can be said to create a Pareto optimal outcome. The direct market can be classified as adecentralized, continuous, open-bid, double-auction market, while thebrokered market is a quasi-centralized, continuous, limit-book, single-auction market. The terms "open-bid" and "limit-book" refer to ways in which priceinformation is communicated (Flood, 1991, p. The increase in the quantity purchased byone group of customers is matched by the reduction in the demand by othercustomers. Summary and Conclusions The purpose of this research was to assess the contention that theapplication of information technology to the process of international tradeleads to Pareto Optimality. (1995, October). Information sharing incredit markets. (3rd ed.). Costs, however,also are associated with the application of information technology,although such costs may not outweigh the benefits of such application oreven cause disequilibrium and dislocations over long periods. In an uncertain environment, the introduction of pricediscrimination coincides with the elimination of uncertainty about types,so that the increase in lending to safe borrowers does not fully compensatefor the reduction in lending to the risky, and total lending falls (Pagano& Jappelli, 1993, p. 1693). Inter-firm networking is increasingly important in economic life,because of its capacity for regulating complex transactionalinterdependence as well as cooperative interdependence among firms on aglobal scope (Gandori & Soda, 1995, p. Louis Review, 73(6),52-7 . A., & Choudhri, E. 19 ). Costs, however,also are associated with the application of information technology,although such costs may not outweigh the benefits of such application oreven cause disequilibrium and dislocations over long periods. 58). Direct trading in foreign exchange approximates the standardopen-bid structure. Fenestra and Lewis (1994, pp. 17 4). Journal of International Economics, 25(1), 143-154. The experience of the applicationof information technology to international trade is related and assessedwithin the context of the Pareto Criterion. Implications of the assessmentare discussed. Each foreign exchange broker accumulates a subset of market-makers' limit orders. Far flung image. (1991). Analysis of the Issue The literature on international credit markets shows that asymmetricinformation may prevent the efficient allocation of lending, leading tocredit rationing or to a wedge between lending and borrowing rates (Pagano& Jappelli, 1993, p. The limit order book, whichis used by both foreign exchange brokers and stock exchange specialists, isanother intermediate form of price communication. 2 1-221) found that where all factors ofproduction are imperfectly mobile, gains from international trade are notPareto Optimal. Feenstra, R. Microstructure theory and theforeign exchange market. 56). Shy, O. InstitutionalInvestor, 29(7), 19. Limiting theinvestigation to the process of international trade removes fromconsideration the applications of information technology to productionprocesses, product design, and similar activities that arguably have animpact on international trade. The difference in time between orderplacement and execution can impose real costs on investors. Information technology applications,however, can improve lender knowledge about new customers by exchanginginformation with through international information networks (Worsham, 1995,p. The efficiency gains ofcentralized price information may imply economies of scale and, thus, anatural monopoly for brokers in securities markets. In this way, one may beable to predict when a symmetrically or asymmetrically owned joint ventureis likely to be formed, or what solution among two or more Pareto-efficientorganizational agreements will be chosen because of particular properties(Gandori & soda, 1995, p. Because brokerage tends to centralizetrading and price information, it uses time more efficiently, eliminatesthe most important arbitrages, and benefits dealers by ensuring that ordersare executed according to price priority. Flood, M. A history of economictheory and method. The distinction between a continuous market and a call market involvesthe degree of temporal consolidation: in a call market, trading occurs atpre-appointed times, with arriving transaction orders detained until thenext call for execution, while in continuous markets, such as the foreignexchange market, trading occurs at its own pace, and transaction orders areprocessed as they arrive (Flood, 1991, p. The first major area of discussion is the Pareto Criterion.The Pareto Criterion is defined, the evaluation structure is explained, andthe method of applying the criterion to the issue investigated isdescribed. (1994, May). A persistent deviation from optimality might beexplained, for example, by arguing that the allocational benefits of a callmarket system are a public good" (Flood, 1991, p. O'Connor, R. Improving the exchange of information, however,does not of necessity lead to Pareto Optimal outcomes. The findings of the research performed are presented in two majordiscussions. Journal of Finance, 48(5), 1693-1718. Organization Studies, 16(2), 183-214. At the opposite extreme, in a sealed-bid market, orders areknown only to the entity placing the order and perhaps to a disinterestedauctioneer. The bilateralnature of such contacts and the time consumed by each contact togetherimply, however, that all participants cannot be simultaneously informed ofthe current quotes of a market-maker. There is some evidence that differences in the degree ofcentralization between various markets cause differences in marketperformance (Flood, 1991, p. 1694). This definition of economic efficiency is derivedfrom the Pareto Criterion, which holds that an increase in total welfareoccurs when someone is made better off, while no one is made worse off inrelation to a particular action. (1995, Spring). References Benoit, E. On the other hand, the periodic batching of orders that occurs ina call market also has disadvantages. While this activity helps explain the multiplicity ofbrokers, it does not fully resolve the issue of decentralization in theinterbank direct market (Flood, 1991, p. Thus, if one holds the position thateconomic efficiency exists within an economy, then the introduction of achange in resource allocation to provide for equality of opportunity willbe viewed as one which requires a tradeoff between equality and efficiency. The application of information technology to the process ofinternational trade represents a change in the allocation of resources-technology-to a specific activity-the conduct of international trade inrelation to any or all products and services. (1995, September). D. Similarly,periodic calls delay any information conveyed by prices until the time ofthe call, introducing price uncertainty in the period between the calls.In sum, a trade-off exists between the allocational efficiency of the callmarket system and the informational efficiency and immediacy of thecontinuous market system. Journal of International Economics,36(3-4), 2 1-221. In a centralized market, trades are carried out at publicly announcedprices and all traders have access to the same trading opportunities(Flood, 1991, p. Grandori, A., & Soda, G. 19 ). 19). Where these criteria do not prevail, however, informationsharing reduces the volume of loans, because it (1) enables the monopolistto practice price discrimination, and (2) eliminates uncertainty aboutborrower types. As in the direct market,market-makers must contact brokers bilaterally to get these inside spreads(Benoit, 1995, p. The foreign exchange market combines two disparate auction structuresfor the same commodity: the interbank direct market and the brokered market(Flood, 1991, p. PARETO EFFECTS OF THE APPLICATION OF INFORMATION TECHNOLOGY TO INTERNATIONAL TRADE Abstract Information technology has been and continues to be applied in a widerange of economic activities. Journal of InternationalEconomics, 36(3-4), 223-238. Obviously, some arrangements will notproduce Pareto Optimal outcomes from the application of informationtechnology to the process of international trade. 223-238) found that gainsfrom international trade cannot in many instances offset the costs of lostjobs in one economy, and thus are not always Pareto Optimal. This network of brokerage nodes is as different froma fully centralized system as it is from a fully decentralized one. In an open-bid market,offers to buy or sell at a specified price are announced to all agents inthe market. A general equilibrium model of Pareto inferiortrade. The costs(within the contexts of disequilibrium and dislocations) associated withthe application of information technology to an economic activity, however,may be substantial over the short-term, as a minimum. C., & Lewis, T. F. The heterogeneity ofborrowers raises the net benefit from the application of informationtechnology: the gain from eliminating the asymmetry of information betweenborrowers and lenders increases with the uncertainty about the quality ofapplicants. These findingsimply that both governments and economic organizations should developmechanisms to protect those parties that will be hurt by the applicationsof technological innovation when the greater good supports suchapplications. Federal Reserve Bank of St. 183). Chavez, J. 57). Picking up the pace: Trade automation ison the way. As the precedingdiscussion indicated, the Pareto characteristic of such outcomes isdependent upon the conditions peculiar to the specific market. "It is not clear whether the microstructure ofthe foreign exchange market represents a globally optimal balance of theserelative advantages. The basicthrust of these arguments is that, with continuous trading, earliertransactions satisfy some consumers and producers, causing shifts in supplyand demand that affect prices for later transactions. PARETO EFFECTS OF THE APPLICATION OF INFORMATION TECHNOLOGY TO INTERNATIONAL TRADE Introduction Information technology has been and continues to be applied in a widerange of economic activities. 56). Marketparticipants are willing to pay a liquidity premium, usually embedded in amarket-maker's spread, for the reduction in search costs implied byconstant access to a counter party. Brokers do communicate amongthemselves, however, to eliminate the possibility of arbitrage betweenlimit order books. The investigation explores the issue withinthe theoretical context of the Pareto criterion. In order to understand the structure of an inter-firm coordinationagreement in relation to the application of information technology to theprocess of international trade, the specific utilities of the partner firmsmust be considered, as well as the type of negotiation process that islikely to emerge (Gandori & Soda, 1995, p. This practical constraint on thedissemination of price information is significant, because it introducesthe possibility of genuine arbitrage, that is, of finding two market-makerswhose current bid-ask spreads do not overlap. (1995, July). Brecher and Chourdhri (1994, pp. Nation'sBusiness, 83(1 ), 4 . The findings of the research performed indicate thatPareto Optimality may characterize the outcomes of some applications ofinformation technology to the process of international trade, but that notall such outcomes will be Pareto Optimal in character. This issue is explored through a consideration of the application ofinformation technology to the process of international trade. In principle, any participantcan contact a market-maker at any time for a price quote. In such an environment, lenders may fail toobserve some relevant characteristic or action of potential borrowers andhave no way of learning about it. New York: McGraw-Hill, Inc. Worsham, J. The term "network" is anabstract notion referring to a set of nodes and relationships which connectthem, and it is used in a variety of sciences, including not onlyorganization theory but also neuro-sciences, operational research,communication theory and small group theory. If, on the other hand, one holds the position that the existing allocationof resources within an economy is not perfectly efficient, then theintroduction of a change in resource allocation may be viewed as a means ofincreasing total welfare. 58). 44-46). (1995, July). U. As a result, thePareto-efficiency characteristic does not necessarily obtain in continuousmarkets. 57). Most frequently, one hears only of thebenefits associated with the application of information technology in somespecific industry or to some particular economic process. 59). The conclusion drawn from this research is thatadvances in technology should be applied in the economic arena asappropriate, but not in the absence of the simultaneous implementation ofprotective safety nets for those parties that will suffer from suchactions. Theoretical work indicates howcontinuous trading can alter allocations, the process of price discoveryand even the ultimate equilibrium price (Flood, 1991, p. They are modes of coordination amongspecialized organizational units (Gandori & Soda, 1995, p. Information sharing is important within the contexts of (1)increasing the degree of competitiveness within credit markets, (2)improving efficiency in the allocation of credit, and (3) increasing thevolume of lending (Pagano & Jappelli, 1993, p. 1699). Any technical innovation that reduces the costs of filing, organizing,and distributing information should foster information exchange (Pagano &Jappelli, 1993, p. In a decentralized market, prices are quoted andtransactions are concluded in private meetings among agents. Most frequently, one hears only of thebenefits associated with the application of information technology in somespecific industry or to some particular economic process. Other things equal, an efficient system ofprice communication is one that minimizes such transaction costs. By this definition, if sucha reallocation were possible, then the existing allocation could not beeconomically efficient. (1988, August). More generally, price communication is intimately related to therole of market-makers as providers of predictable immediacy. Pareto gains fromtrade, reconsidered: Compensating for jobs lost. (1991, November-December). TF24-TF27). The costs of finding the other side ofa transaction can be further broken down into the liquidity concession, thecost of communicating the information and the cost of waiting for potentialcounter parties to respond. 59). Otherwise, suchapplications would not be made. A global reach for small firms. 4 ). R. Thus, the fact that anumber of brokers service the foreign exchange market seems to represent adiscrepancy between theory and reality. Within an economic context,networks as modes of organizing economic activities through inter-firmcoordination and cooperation lie at the core of organization theory(O'Connor, 1995, pp. The findings of the research performedindicate that Pareto Optimality may characterize the outcomes of someapplications of information technology to the process of internationaltrade, but that not all such outcomes will be Pareto Optimal in character.These findings imply that both governments and economic organizationsshould develop mechanisms to protect those parties that will be hurt by theapplications of technological innovation when the greater good supportssuch applications. Information sharing through the application of information technologyto the process of international trade is more advantageous the greater thedemand for loans, the higher the geographical mobility of the borrower, thelower the cost of operating the system, and the greater the number ofparticipants (Pagano & Jappelli, 1993, p. (1993, December). (1994, May). Pagano, M., & Jappelli, T. The salient difference between the foreign exchangemarket and the standard arrangement is the bilateral pairing ofparticipants in the foreign exchange market. Thedistinction between centralized and decentralized markets might seem toprovide a neat dichotomy of possible market structures; however, themultiplicity of brokers in the foreign exchange market violates this simpletaxonomy. 57). Knowledge of the concealed limit orders would be ofspeculative value to market-makers, because an imbalanced book suggeststhat large future price movements are more likely in one direction than theother. 183). This issue isexplored in this research. Brecher, R. 17 ). A recurringargument in the literature is the willingness of investors to pay more-aliquidity premium-for the ability to trade immediately. 44-46). CA Magazine (Scotland),99(1 68), 44-46. The conclusion drawn from this research is that advances intechnology should be applied in the economic arena as appropriate, but notin the absence of the simultaneous implementation of protective safety netsfor those parties that will suffer from such actions. With no uncertainty and linear demand, pricediscrimination does not affect the optimal quantity for a monopolist(Chavez, 1995, pp. Thus,Pareto Optimality does not of necessity characterize these transactionsregardless of the application of information technology (Shy, 1988, pp. 57). An assumption may be madethat some party reaps benefits from such applications. Orders across borders. The second major area of discussion involves the analysis ofthe issue within the Pareto Criterion.
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