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Entrepreneurial Selection, Financial Markets, and Patterns of International Trade

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  • Bin Xu

Abstract

This paper introduces entrepreneurial selection and imperfect financial markets to the 2x2x2 model of international trade. Entrepreneurs are heterogeneous in ability and borrow from banks who do not observe their ability. The pattern of international trade depends on (1) factor abundance, (2) endogenously determined productivity, and (3) endogenously determined financial market imperfections. We show that entrepreneurial selection results in a diminished Rybczynski effect and financial market imperfections further reduce the effect; hence differences in capital abundance imply a smaller trade volume than predicted by the Heckscher-Ohlin theorem. The results help to resolve a conflict between the Heckscher-Ohlin model and data. [F11]

Suggested Citation

  • Bin Xu, 2001. "Entrepreneurial Selection, Financial Markets, and Patterns of International Trade," International Economic Journal, Taylor & Francis Journals, vol. 15(3), pages 147-167.
    • Handle: RePEc:taf:intecj:v:15:y:2001:i:3:p:147-167
    DOI: 10.1080/10168730100000048
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    References listed on IDEAS

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    1. Elhanan Helpman, 1999. "The Structure of Foreign Trade," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 121-144, Spring.
    2. Ronald Findlay, 1995. "Factor Proportions, Trade, and Growth," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061759, December.
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    4. Lucas, Robert E, Jr, 1990. "Why Doesn't Capital Flow from Rich to Poor Countries?," American Economic Review, American Economic Association, vol. 80(2), pages 92-96, May.
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    6. Helpman, Elhanan & Razin, Assaf, 1979. "A Theory of International Trade Under Uncertainty," Elsevier Monographs, Elsevier, edition 1, number 9780123396501 edited by Shell, Karl.
    7. Trefler, Daniel, 1993. "International Factor Price Differences: Leontief Was Right!," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 961-987, December.
    8. Anderson, James E., 1981. "The Heckscher-Ohlin and Travis-Vanek theorems under uncertainty," Journal of International Economics, Elsevier, vol. 11(2), pages 239-247, May.
    9. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
    10. Trefler, Daniel, 1995. "The Case of the Missing Trade and Other Mysteries," American Economic Review, American Economic Association, vol. 85(5), pages 1029-1046, December.
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    Cited by:

    1. Nunn, Nathan & Trefler, Daniel, 2014. "Domestic Institutions as a Source of Comparative Advantage," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 263-315, Elsevier.

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