Extracting the Costs of International Internet Communication

A large and increasing share of communication now takes place by Internet, but due to the decentralized nature of the Internet, it is difficult to measure the bilateral costs of Internet communication. In this paper, I develop a model to extract an index of the costs of international Internet communication, based on the model of physical transportation of goods from Allen and Arkolakis (2014). This model enables me to extract these costs using data which is, for the most part, publicly available. I then employ these extracted costs in a gravity model of trade, finding that different economic sectors react heterogeneously to changes in communication costs. Aspects of this heterogeneity in trade of goods resemble results from Keller and Yeaple (2013), while the heterogeneity I observe in trade of services appears to be a novel result.

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