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Trade and financial liberalization with asymmetric information in bank financing

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  • Bin Xu

Abstract

We investigate trade and financial openness in a small developing country where entrepreneurs need bank financing to operate in an import-competing sector but banks do not observe their ability. This informational asymmetry causes adverse selection of low-ability individuals into entrepreneurship and also prevents poor but able individuals from being entrepreneurs. We find that trade opening improves national welfare, but a tax is needed on foreign financial capital. Trade opening reduces an income gap between the rich and the poor, while financial opening affects this income gap ambiguously.

Suggested Citation

  • Bin Xu, 2003. "Trade and financial liberalization with asymmetric information in bank financing," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 6(2), pages 57-69.
  • Handle: RePEc:taf:jpolrf:v:6:y:2003:i:2:p:57-69
    DOI: 10.1080/1384128032000145297
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    References listed on IDEAS

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    1. Grossman, G.M., 1998. "Imperfect Labour Contracts and International Trade," Papers 205, Princeton, Woodrow Wilson School - Public and International Affairs.
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    6. Ben Bernanke & Mark Gertler, 1990. "Financial Fragility and Economic Performance," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 87-114.
    7. Harry Flam & Robert W. Staiger, 1989. "Adverse Selection in Credit Markets and Infant Industry Protection," NBER Working Papers 2864, National Bureau of Economic Research, Inc.
    8. 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.
    9. Bond, Eric W., 1986. "Entrepreneurial ability, income distribution, and international trade," Journal of International Economics, Elsevier, vol. 20(3-4), pages 343-356, May.
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