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...

This paper investigates the welfare effects of international trade when technological idiosyncratic risk is distorted by optimistic and pessimistic managers. We show that free trade always improves the ex-ante welfare but sometimes lowers the ex-post welfare. Free trade commitment can be...