|Eckel, Carsten; Unger, Florian (21. May 2015): Credit constraints, endogenous innovations, and price setting in international trade. Discussion Papers in Economics 2015-8|
We introduce credit frictions motivated by moral hazard in a general equilibrium model of international trade with two dimensions of heterogeneity and endogenous investments. Firms’ competitiveness consists of capabilities to conduct process and quality innovations at low costs, whereas investment outlays have to be financed by external capital. We show that the scope for vertical product differentiation in a sector determines how credit tightening affects investment and price setting. Consistent with recent empirical evidence, our model rationalizes positive as well as negative correlations of firm-level FOB prices with financial frictions and variable trade costs. Faced with an increase in the borrowing rate, producers reduce both types of innovation resulting in opposing effects on marginal production costs and prices. In general equilibrium, financial frictions intensify quality-based (cost-based) sorting of firms if the scope for vertical product differentiation is high (low). Consequently, credit tightening leads to firm exit, increased innovation activity among existing suppliers, and welfare losses that are larger in sectors with low investment intensity.
|Item Type:||Paper (Discussion Paper)|
|Keywords:||international trade, external finance, credit constraints, moral hazard, quality, innovation, product Prices.|
Economics > Munich Discussion Papers in Economics
|Subjects:||300 Social sciences > 330 Economics|
|JEL Classification:||F12, G32, L11|
|Deposited On:||21. May 2015 12:30|
|Last Modified:||21. May 2015 18:17|
Amiti, M. and D. E.Weinstein (2011). Exports and Financial Shocks. The Quarterly Journal of Economics 126 (4), 1841-1877.
Antoniades, A. (2015). Heterogeneous Firms, Quality, and Trade. Journal of International Economics 95 (2), 263-273.
Antràs, P. and R. J. Caballero (2009). Trade and Capital Flows: A Financial Frictions Perspective. Journal of Political Economy 117 (4), 701-744.
Antràs, P., M. A. Desai, and C. F. Foley (2009). Multinational Firms, FDI Flows, and Imperfect Capital Markets. The Quarterly Journal of Economics 124 (3), 1171-1219.
Arkolakis, C. (2010). Market Penetration Costs and the New Consumers Margin in International Trade. Journal of Political Economy 118 (6), 1151-1199.
Athey, S. and A. Schmutzler (1995). Product and Process Flexibility in an Innovative Environment. RAND Journal of Economics 26 (4), 557-574.
Baldwin, R. and J. Harrigan (2011). Zeros, Quality, and Space: Trade Theory and Trade Evidence. American Economic Journal: Microeconomics 3 (2), 60-88.
Bastos, P. and J. Silva (2010). The quality of a firm’s exports: Where you export to matters. Journal of International Economics 82 (2), 99-111.
Berman, N. and J. Héricourt (2010). Financial factors and the margins of trade: Evidence from cross-country firm-level data. Journal of Development Economics 93 (2), 206-217.
Bernard, A. B., S. J. Redding, and P. K. Schott (2011). Multiproduct Firms and Trade Liberalization. The Quarterly Journal of Economics 126 (3), 1271-1318.
Bernini, M., S. Guillou, and F. Bellone (2013). Firms’ Leverage and Export Quality: Evidence from France. GREDEG Working Papers 2013-29, University of Nice Sophia Antipolis.
Buch, C. M., I. Kesternich, A. Lipponer, and M. Schnitzer (2010). Exports Versus FDI Revisited: Does Finance Matter? CEPR Discussion Papers 7839.
Bustos, P. (2011). Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms. American Economic Review 101 (1), 304-40.
Chaney, T. (2013). Liquidity Constrained Exporters. NBERWorking Papers 19170, National Bureau of Economic Research, Inc.
Chor, D. and K. Manova (2012). Off the cliff and back? Credit conditions and international trade during the global financial crisis. Journal of International Economics 87 (1), 117-133.
Ciani, A. and F. Bartoli (2014). Export quality upgrading under credit constraints. Technical report, Bocconi University.
Contessi, S. and F. de Nicola (2012). What do we know about the relationship between access to finance and international trade? Working Papers 2012-054, Federal Reserve Bank of St. Louis.
Crozet, M., K. Head, and T. Mayer (2012). Quality Sorting and Trade: Firm-level Evidence for French Wine. Review of Economic Studies 79 (2), 609-644.
Eckel, C., L. Iacovone, B. Javorcik, and J. P. Neary (2015). Multi-product firms at home and away: Cost- versus quality-based competence. Journal of International Economics 95 (2), 216-232.
Egger, P. and C. Keuschnigg (2015). Innovation, Trade, and Finance. American Economic Journal: Microeconomics 7 (2), 121-57.
Ehrlich, M. V. and T. Seidel (2013). Regional Implications of Financial Market Development: Credit Rationing, Trade, and Location. CESifo Working Paper Series 4063, CESifo Group Munich.
Fan, H., E. L.-C. Lai, and Y. A. Li (2015). Credit constraints, quality, and export prices: Theory and evidence from china. Journal of Comparative Economics 43 (2), 390-416.
Fan, H., Y. A. Li, and S. R. Yeaple (2014). Trade Liberalization, Quality, and Export Prices. NBER Working Papers 20323, National Bureau of Economic Research, Inc.
Feenstra, R. C., Z. Li, and M. Yu (2014). Exports and Credit Constraints under Incomplete Information: Theory and Evidence from China. The Review of Economics and Statistics 96 (3), 729-744.
Flach, L. (2014). Quality upgrading and price heterogeneity: Evidence from brazilian exporters. Working paper, University of Munich.
Foster, L., J. Haltiwanger, and C. Syverson (2008). Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability? American Economic Review 98 (1), 394-425.
Furusawa, T. and N. Yanagawa (2010). Firm Heterogeneity under Financial Imperfection: Impacts of Trade and Capital Movement. CIRJE F-Series CIRJE-F-768, CIRJE, Faculty of Economics, University of Tokyo.
Hallak, J. C. and J. Sivadasan (2013). Product and process productivity: Implications for quality choice and conditional exporter premia. Journal of International Economics 91 (1), 53-67.
Helpman, E., M. J. Melitz, and S. R. Yeaple (2004). Export Versus FDI with Heterogeneous Firms. American Economic Review 94 (1), 300-316.
Holmstrom, B. and J. Tirole (1997). Financial Intermediation, Loanable Funds, and the Real Sector. The Quarterly Journal of Economics 112 (3), 663-91.
Hou, L. and J. Zhang (2012). Multiple finances, margins of foreign direct investment and aggregate industry productivity. Financial Theory and Practice 36 (1), 1-28.
Irlacher, M. and F. Unger (2015, May). Capital Market Imperfections and Trade Liberalization in General Equilibrium. Discussion Papers in Economics 24848, University of Munich, Department of Economics.
Johnson, R. C. (2012). Trade and prices with heterogeneous firms. Journal of International Economics 86 (1), 43-56.
Khandelwal, A. (2010). The Long and Short (of) Quality Ladders. Review of Economic Studies 77 (4), 1450-1476.
Klepper, S. (1996). Entry, Exit, Growth, and Innovation over the Product Life Cycle. American Economic Review 86 (3), 562-83.
Krugman, P. (1991). Increasing Returns and Economic Geography. Journal of Political Economy 99 (3), 483-99.
Kugler, M. and E. Verhoogen (2012). Prices, Plant Size, and Product Quality. Review of Economic Studies 79 (1), 307-339.
Lambertini, L. and A. Mantovani (2010). Process and product innovation: A differential game approach to product life cycle. International Journal of Economic Theory 6 (2), 227-252.
Lileeva, A. and D. Treer (2010). Improved Access to Foreign Markets Raises Plant-Level Productivity... for Some Plants. The Quarterly Journal of Economics 125 (3), 1051-1099.
Lin, P. and K. Saggi (2002). Product differentiation, process R&D, and the nature of market competition. European Economic Review 46 (1), 201-211.
Manova, K. (2013). Credit Constraints, Heterogeneous Firms, and International Trade. Review of Economic Studies 80 (2), 711-744.
Manova, K. and C. F. Foley (2014). International trade, multinational activity, and corporate finance. Working paper.
Manova, K. and Z. Zhang (2012). Export Prices Across Firms and Destinations. The Quarterly Journal of Economics 127 (1), 379-436.
Mayneris, F. (2011). A new perspective on the firm size-growth relationship: Shape of profits, investment and heterogeneous credit constraints. Discussion Papers 2011044, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
Melitz, M. J. (2003). The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity. Econometrica 71 (6), 1695-1725.
Melitz, M. J. and G. I. P. Ottaviano (2008). Market Size, Trade, and Productivity. Review of Economic Studies 75 (1), 295-316.
Minetti, R. and S. C. Zhu (2011). Credit constraints and firm export: Microeconomic evidence from Italy. Journal of International Economics 83 (2), 109-125.
Muûls, M. (2014). Exporters, importers and credit constraints. Journal of International Economics 95 (2), 333-343.
Peters, K. and M. Schnitzer (2015). Trade liberalization and credit constraints: Why opening up may fail to promote convergence. forthcoming in: Canadian Journal of Economics 48 (3).
Roberts, M. J. and D. Supina (1996). Output price, markups, and producer size. European Economic Review 40 (3), 909-921.
Rosenkranz, S. (2003). Simultaneous choice of process and product innovation when consumers have a preference for product variety. Journal of Economic Behavior & Organization 50 (2), 183-201.
Secchi, A., F. Tamagni, and C. Tomasi (2014). Export price adjustments under financial constraints. Document de travail du Centre d’Economie de la Sorbonne 2013.57R.
Sutton, J. (2001). Technology and Market Structure: Theory and History, Volume 1 of MIT Press Books. The MIT Press.
Sutton, J. (2007). Quality, Trade and the Moving Window: The Globalisation Process. Economic Journal 117 (524), F469-F498.
Sutton, J. (2012). Competing in Capabilities: The Globalization Process. Oxford University Press.
Suwantaradon, R. (2012). Financial frictions and international trade. Financial Intermediation Research Society Conference.
Tirole, J. (2006). The Theory of Corporate Finance. Princeton: Princeton University Press.
Yeaple, S. R. (2005). A simple model of firm heterogeneity, international trade, and wages. Journal of International Economics 65 (1), 1-20.