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This paper proposes an international trade model under uncertainty in which international differences in financial development provide the basis for trade. When preferences exhibit risk vulnerability as defined by Gollier and Pratt [1996], financial development reduces individuals’ risk aversion. Hence, international differences in financial development can induce international differences in risk aversion. We show that all the individuals have the feeling that trade is welfare improving before the resolution of uncertainty. So, all individuals are in favour of free trade ex ante. But, the ex post welfare of the more risk averse country can decrease after the resolution of uncertainty. Contrary to the less risk averse country, the more risk averse country, with the less developed financial system, is likely to regret his decision in favour of free trade commitment. |
