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Capital Constraints, Trade and Crowding Out of Southern Firms

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    Abstract

    Introducing capital market imperfections to a 'footloose capital'’model, I show how such distortions may explain the observed phenomena of an industrialized north and an underdeveloped south. Further, I show that with inter-generational savings internationalization will cause a crowding out of manufacturing firms in the south, increasing the share of the southern population that are credit-constrained, and also reducing total income in the country. This should not, however, be taken as an argument for protectionism, as welfare may indeed be higher with trade than in autarky, if trade costs are sufficiently low.

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    File URL: http://www.uib.no/filearchive/wp05.11.pdf
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    Bibliographic Info

    Paper provided by University of Bergen, Department of Economics in its series Working Papers in Economics with number 05/11.

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    Length: 57 pages
    Date of creation: 02 Feb 2011
    Date of revision:
    Handle: RePEc:hhs:bergec:2011_005

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    Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway
    Phone: (+47)55589200
    Fax: (+47)55589210
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    Web page: http://www.uib.no/econ/en
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    Keywords: Capital constraints; Home market effect; Gain from trade;

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    1. Ranjan, Priya, 2001. "Dynamic evolution of income distribution and credit-constrained human capital investment in open economies," Journal of International Economics, Elsevier, vol. 55(2), pages 329-358, December.
    2. Ciccone, Antonio & Hall, Robert E, 1996. "Productivity and the Density of Economic Activity," American Economic Review, American Economic Association, vol. 86(1), pages 54-70, March.
    3. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
    4. Krugman, Paul & Venables, Anthony J., 1995. "Globalization and the Inequality of Nations," Working Paper Series 430, Research Institute of Industrial Economics.
    5. Das, Satya P., 2006. "Trade, skill acquisition and distribution," Journal of Development Economics, Elsevier, vol. 81(1), pages 118-141, October.
    6. Diego Puga, 2010. "The Magnitude And Causes Of Agglomeration Economies," Journal of Regional Science, Wiley Blackwell, vol. 50(1), pages 203-219.
    7. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
    8. Martin, Philippe & Rogers, Carol Ann, 1994. "Industrial Location and Public Infrastructure," CEPR Discussion Papers 909, C.E.P.R. Discussion Papers.
    9. Chesnokova, Tatyana, 2007. "Immiserizing deindustrialization: A dynamic trade model with credit constraints," Journal of International Economics, Elsevier, vol. 73(2), pages 407-420, November.
    10. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Pol Antràs & Ricardo J. Caballero, 2007. "Trade and Capital Flows: A Financial Frictions Perspective," NBER Working Papers 13241, National Bureau of Economic Research, Inc.
    12. Richard E. Baldwin & Toshihiro Okubo, 2006. "Heterogeneous firms, agglomeration and economic geography: spatial selection and sorting," Journal of Economic Geography, Oxford University Press, vol. 6(3), pages 323-346, June.
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