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Credit Constraints, Quality, and Export Prices: Theory and Evidence from China

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  • Haichao Fan
  • Edwin L.-C. Lai
  • Yao Amber Li

Abstract

This paper examines the relationship between the credit constraints faced by a firm and the unit value prices of its exports. The paper modifies Arkolakis’s (2010) model of trade with heterogeneous firms by introducing endogenous quality and credit constraints. The model predicts that tighter credit constraints faced by a firm reduce its optimal prices as its choice of lower-quality products dominates the price distortion effect resulting from credit constraints. However, a competing theory based on the alternative assumption that quality is exogenous across firms would predict completely opposite results: Prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data, Chinese firm-level data from the National Bureau of Statistics of China (NBSC), and Chinese customs data strongly supports the predictions of the endogenous-quality model. Moreover, the predictions of the exogenous-quality model are supported by using quality-adjusted prices in regression analysis. In addition, we confirm the mechanism of quality adjustment: firms optimally choose to produce lower-quality products when facing tighter credit constraints.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2013/wp-cesifo-2013-08/cesifo1_wp4370.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4370.

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Date of creation: 2013
Date of revision:
Handle: RePEc:ces:ceswps:_4370

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Keywords: credit constraints; credit access; credit needs; endogenous quality; export prices; quality; heterogeneous firms; productivity;

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References

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  1. Davin Chor & Kalina Manova, 2010. "Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis," Working Papers 08-2010, Singapore Management University, School of Economics.
  2. Verhoogen, Eric A., 2007. "Trade, Quality Upgrading and Wage Inequality in the Mexican Manufacturing Sector," CEPR Discussion Papers 6385, C.E.P.R. Discussion Papers.
  3. Claessens, Stijn & Laeven, Luc, 2002. "Financial Development, Property Rights and Growth," CEPR Discussion Papers 3295, C.E.P.R. Discussion Papers.
  4. Juan Carlos Hallak, 2006. "A Product-Quality View of the Linder Hypothesis," NBER Working Papers 12712, National Bureau of Economic Research, Inc.
  5. Pinelopi Koujianou Goldberg & Amit Kumar Khandelwal & Nina Pavcnik & Petia Topalova, 2010. "Imported Intermediate Inputs and Domestic Product Growth: Evidence from India," The Quarterly Journal of Economics, MIT Press, vol. 125(4), pages 1727-1767, November.
  6. Gordon M. Phillips & Giorgo Sertsios, 2011. "How Do Firm Financial Conditions Affect Product Quality and Pricing?," NBER Working Papers 17233, National Bureau of Economic Research, Inc.
  7. Lu, Jiangyong & Lu, Yi & Tao, Zhigang, 2010. "Exporting behavior of foreign affiliates: Theory and evidence," Journal of International Economics, Elsevier, vol. 81(2), pages 197-205, July.
  8. Mary Amiti & Jozef Konings, 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, vol. 97(5), pages 1611-1638, December.
  9. Miaojie Yu, 2010. "Processing Trade, Firms Productivity, and Tariff Reductions : Evidence from Chinese Products," Trade Working Papers 22873, East Asian Bureau of Economic Research.
  10. Antoine Gervais, 2013. "Product Quality and Firm Heterogeneity in International Trade," Working Papers 13-08, Center for Economic Studies, U.S. Census Bureau.
  11. Richard Baldwin & James Harrigan, 2011. "Zeros, Quality, and Space: Trade Theory and Trade Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 3(2), pages 60-88, May.
  12. John Sutton, 2007. "Sunk Costs and Market Structure: Price Competition, Advertising, and the Evolution of Concentration," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262693585, December.
  13. Brandt, Loren & Van Biesebroeck, Johannes & Zhang, Yifan, 2012. "Creative accounting or creative destruction? Firm-level productivity growth in Chinese manufacturing," Journal of Development Economics, Elsevier, vol. 97(2), pages 339-351.
  14. Dinlersoz, Emin M. & Yorukoglu, Mehmet, 2008. "Informative advertising by heterogeneous firms," Information Economics and Policy, Elsevier, vol. 20(2), pages 168-191, June.
  15. Minetti, Raoul & Zhu, Susan Chun, 2011. "Credit constraints and firm export: Microeconomic evidence from Italy," Journal of International Economics, Elsevier, vol. 83(2), pages 109-125, March.
  16. James Riedel & Jing Jin & Jian Gao, 2007. "Overview of Economic Reforms and Outcomes, from How China Grows: Investment, Finance, and Reform
    [How China Grows: Investment, Finance, and Reform]
    ," Introductory Chapters, Princeton University Press.
  17. Costas Arkolakis, 2010. "Market Penetration Costs and the New Consumers Margin in International Trade," Journal of Political Economy, University of Chicago Press, vol. 118(6), pages 1151 - 1199.
  18. Johnson, Robert C., 2012. "Trade and prices with heterogeneous firms," Journal of International Economics, Elsevier, vol. 86(1), pages 43-56.
  19. Robert C. Feenstra & Zhiyuan Li & Miaojie Yu, 2011. "Exports and Credit Constraints Under Incomplete Information: Theory and Evidence from China," NBER Working Papers 16940, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Angelo Secchi & Federico Tamagni & Chiara Tomasi, 2013. "Export price adjustments under financial constraints," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00848159, HAL.
  2. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sr364g4 is not listed on IDEAS
  3. Fan, Haichao & Li, Yao Amber & Yeaple, Stephen, 2013. "Trade Liberalization, Quality, and Export Prices," MPRA Paper 51370, University Library of Munich, Germany.
  4. Michele Bernini & Sarah Guillou & Flora Bellone, 2013. "Firms' Leverage and Export Quality: Evidence from France," GREDEG Working Papers 2013-29, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  5. Sarah Guillou & Michel Bernini & Flora Bellone, 2013. "Firms leverage and export quality evidence from France," Sciences Po publications 2013-13, Sciences Po.

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