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Capital market imperfections and trade liberalization in general equilibrium

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  • Irlacher, Michael
  • Unger, Florian

Abstract

This paper develops a new international trade model with firm-specific credit frictions and endogenous borrowing costs in general equilibrium. We highlight new implications of globalization when general equilibrium effects on capital markets are present. In particular, we show that globalization increases the share of financially constrained firms and affects producers very differently depending on their exposure to credit frictions. While the positive effect of globalization dominates for unconstrained firms, higher borrowing costs and tougher competition especially hurt credit-rationed producers. We show that these new adjustments increase the heterogeneity among firms and reduce welfare gains from trade. Our theory is consistent with new empirical patterns from World Bank firm-level data. We show that credit frictions are positively related to the degree of product competition and to the variance of sales across firms.

Suggested Citation

  • Irlacher, Michael & Unger, Florian, 2018. "Capital market imperfections and trade liberalization in general equilibrium," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 402-423.
  • Handle: RePEc:eee:jeborg:v:145:y:2018:i:c:p:402-423
    DOI: 10.1016/j.jebo.2017.11.029
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    Cited by:

    1. Carlo Altomonte & Domenico Favoino & Tommaso Sonno, 2017. "Markups, Productivity and the Financial Capability of Firms," BAFFI CAREFIN Working Papers 1755, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Irlacher, Michael & Unger, Florian, 2018. "Capital market imperfections and trade liberalization in general equilibrium," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 402-423.
    3. Eckel, Carsten & Unger, Florian, 2015. "Credit constraints, endogenous innovations, and price setting in international trade," Discussion Papers in Economics 24858, University of Munich, Department of Economics.

    More about this item

    Keywords

    F10; F36; F61; L11; Credit constraints; General equilibrium; Globalization; Imperfect capital markets; Welfare;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts

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