Heterogenous firms and credit frictions: a general equilibrium analysis of market entry decisions
AbstractThis paper develops a general equilibrium model of international trade with heterogeneous firms and imperfect credit markets. To finance the costs for product innovation and domestic and foreign market entry, firms must raise external capital. The model underscores the importance of considering a general equilibrium setting in order to characterize fully the misallocations of resources that stem from the existence of credit frictions. These have important implications for firms' entry decisions in the different markets and for the welfare effects of imperfect financial institutions. Allowing for liquidity-constrained firms and imperfect credit markets alters, and in some cases reverses, some of the main results from the literature on heterogeneous firms. In particular, the model predicts that trade liberalization does not necessarily lead to an increase in average productivity and consumers' welfare.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 940.
Date of creation: Nov 2013
Date of revision:
consumer welfare; credit frictions; heterogeneous firms; market entry; trade liberalization;
Find related papers by JEL classification:
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-20 (All new papers)
- NEP-BEC-2013-12-20 (Business Economics)
- NEP-DGE-2013-12-20 (Dynamic General Equilibrium)
- NEP-INT-2013-12-20 (International Trade)
- NEP-TID-2013-12-20 (Technology & Industrial Dynamics)
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