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Credit constraints, fragmentation, and inter-firm transactions

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  • Sugata Marjit
  • Lei Yang
  • Moushakhi Ray

Abstract

In this paper, we develop a model to illustrate the effects of credit constraints on changes in organizational form and firm entry. We find net borrowers to have a greater incentive to specialize in producing fragments within the production process when internal finance plays an important role (the specialization effect ). Moreover, such credit constraint-induced specialization encourages the entry of new firms (the entry effect ). When the entry effect dominates the specialization effect, total output is greater under fragmentation, which is contrary to the conventional wisdom that fragmentation may lead to the double-marginalization problem and reduce output.

Suggested Citation

  • Sugata Marjit & Lei Yang & Moushakhi Ray, 2014. "Credit constraints, fragmentation, and inter-firm transactions," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 21(1), pages 94-103, March.
    • Handle: RePEc:taf:raaexx:v:21:y:2014:i:1:p:94-103
    DOI: 10.1080/16081625.2014.870462
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    References listed on IDEAS

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    1. Alan V. Deardorff, 2001. "International Provision of Trade Services, Trade, and Fragmentation," Review of International Economics, Wiley Blackwell, vol. 9(2), pages 233-248, May.
    2. Kalina Manova & Shang-Jin Wei & Zhiwei Zhang, 2015. "Firm Exports and Multinational Activity Under Credit Constraints," The Review of Economics and Statistics, MIT Press, vol. 97(3), pages 574-588, July.
    3. Ronald W. Jones & Sugata Marjit, 2018. "The Role of International Fragmentation in the Development Process," World Scientific Book Chapters, in: International Trade Theory and Competitive Models Features, Values, and Criticisms, chapter 15, pages 255-261, World Scientific Publishing Co. Pte. Ltd..
    4. William R. Kerr & Ramana Nanda, 2009. "Financing Constraints and Entrepreneurship," Harvard Business School Working Papers 10-013, Harvard Business School.
    5. repec:fth:michin:463 is not listed on IDEAS
    6. Kiminori Matsuyama, 2005. "Credit Market Imperfections and Patterns of International Trade and Capital Flows," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 714-723, 04/05.
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    Cited by:

    1. Debarati Ghosh & Meghna Dutta, 2023. "Credit Constraints and Increased Firm-Level Production Fragmentation: Evidence from India," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 15(1), pages 93-108, January.

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