Credit constraints, endogenous innovations, and price setting in international trade

Eckel, Carsten and Unger, Florian (21. December 2016): Credit constraints, endogenous innovations, and price setting in international trade. CEPR Discussion Papers No. DP11727, No. 8.

Abstract

This paper analyzes the effects of credit frictions on within-firm adjustments and selection into exporting when both cost-based productivity and product quality matter for the success of a producer. Our model shows that whether FOB prices are positively or negatively correlated with credit frictions and variable trade costs depends on the sectoral R&D intensity. If the latter is high, prices decrease in credit and trade costs, and vice versa. Furthermore, we show that the aggregate effects of financial shocks also depend on the R&D intensity. Stronger credit frictions lead to firm exit, inefficiently high innovation activity among existing suppliers, and welfare losses that are larger in sectors with low R&D intensity. To analyze the effects of credit frictions, we allow for both cost-based and quality-based sorting in a general equilibrium model of international trade. Producers differ in capabilities to conduct process and quality innovations, and external finance is needed for investments.

• Item Type: Paper
• Keywords: Credit constraints; external finance; innovation; International Trade; moral hazard; product prices; Quality
• Faculties: Economics > Chairs > Seminar for International Trade Theory and Trade Policy
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: F12, G32, L11
• Language: English