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Endowment Versus Finance: A Wooden Barrel Theory of International Trade

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Author Info
Ju, Jiandong
Wei, Shang-Jin

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Abstract

This paper develops a theory of international trade in which financial development and factor endowment jointly determine comparative advantage. We apply the financial contract model of Holmstrom and Tirole to the Heckscher-Ohlin-Samuelson (HOS) framework. A key result is what we call the law of a wooden barrel: if the external finance constraint is binding, then augmenting capital stock would have no effect on output and returns. On the other hand, if the external finance constraint is not binding, the standard HOS predictions are resuscitated.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5109.

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Date of creation: Jun 2005
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Handle: RePEc:cpr:ceprdp:5109

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Related research
Keywords: factor endowment; financial development; HOS model; wooden barrel;

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Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
G20 - Financial Economics - - Financial Institutions and Services - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  4. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February. [Downloadable!] (restricted)
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  5. Erik Berglof & Ernst-Ludwig von Thadden, 1994. "Capital Structure with Multiple Investors," CEPR Financial Markets Paper 0044, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 53--56 Great Sutton Street, London EC1V 0DG.
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  32. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Huang, Yongfu & Temple, Jonathan, 2005. "Does External Trade Promote Financial Development?," CEPR Discussion Papers 5150, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Jiandong Ju & Shang-Jin Wei, 2006. "A Solution to Two Paradoxes of International Capital Flows," NBER Working Papers 12668, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Do, Quy-Toan & Levchenko, Andrei A., 2006. "Comparative advantage, demand for external finance, and financial development," Policy Research Working Paper Series 3889, The World Bank. [Downloadable!]
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  4. Jiandong Ju & Shang-Jin Wei, 2008. "When Is Quality of Financial System a Source of Comparative Advantage?," NBER Working Papers 13984, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Pol Antràs & Ricardo J. Caballero, 2007. "Trade and Capital Flows: A Financial Frictions Perspective," NBER Working Papers 13241, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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