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Trade and financial liberalization with asymmetric information in bank financing

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  • Bin Xu
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    Abstract

    We investigate trade and financial openness in a small developing country where entrepreneurs need bank financing to operate in an import-competing sector but banks do not observe their ability. This informational asymmetry causes adverse selection of low-ability individuals into entrepreneurship and also prevents poor but able individuals from being entrepreneurs. We find that trade opening improves national welfare, but a tax is needed on foreign financial capital. Trade opening reduces an income gap between the rich and the poor, while financial opening affects this income gap ambiguously.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/1384128032000145297
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

    Volume (Year): 6 (2003)
    Issue (Month): 2 ()
    Pages: 57-69

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    Handle: RePEc:taf:jpolrf:v:6:y:2003:i:2:p:57-69

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    Related research

    Keywords: Trade Liberalization; Financial Liberalization; Asymmetric Information; Welfare; Income Distribution;

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    1. Bagwell, Kyle & Staiger, Robert W., 1989. "The role of export subsidies when product quality is unknown," Journal of International Economics, Elsevier, vol. 27(1-2), pages 69-89, August.
    2. Kletzer, Kenneth & Bardhan, Pranab, 1986. "Credit Markets and Patterns of International Trade," Department of Economics, Working Paper Series qt1g36f3sd, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Bond, Eric W., 1986. "Entrepreneurial ability, income distribution, and international trade," Journal of International Economics, Elsevier, vol. 20(3-4), pages 343-356, May.
    4. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
    5. Dixit, Avinash K, 1989. "Trade and Insurance with Adverse Selection," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 235-47, April.
    6. Gene M. Grossman & Henrik Horn, 1987. "Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry," NBER Working Papers 2159, National Bureau of Economic Research, Inc.
    7. Harry Flam & Robert W. Staiger, 1989. "Adverse Selection in Credit Markets and Infant Industry Protection," NBER Working Papers 2864, National Bureau of Economic Research, Inc.
    8. Gene M. Grossman, 1999. "Imperfect Labor Contracts and International Trade," NBER Working Papers 6901, National Bureau of Economic Research, Inc.
    9. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
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