1 The Law of One Price , Costly Information and the Law of Price Convergence 1

Agreements for the exchange of commodities consist of explicit, objectively measured contractual components enforced by the state, and implicit, subjective components enforced by sellers’ reputation. People are better informed about the former than about the latter. I expect prices to diverge because the market does not fully adjust for differentials due to changes in the reputational component. The compilers of price indices tend to take account only of the contractual components of exchanged commodities. I therefore expect that the laws of one price as well as that of the PPP would be rejected. I formulate an alternative law: As the cost of information about a commodity falls, the price variability in it will decline. As the cost of information or, more specifically, of measurement falls and especially when commodity standards are formed, transactors will shift attributes from the reputational component of their agreements into their contractual component. Price compilers would then do a more accurate job, and at the same time, uncertainty about the make-up of commodities will decline. Both forces will result in lower observed price variability.