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Trade and financial liberalization with asymmetric information in bank financing

  • Bin Xu
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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.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/1384128032000145297
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Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

Volume (Year): 6 (2003)
Issue (Month): 2 ()
Pages: 57-69

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Handle: RePEc:taf:jpolrf:v:6:y:2003:i:2:p:57-69
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  1. Dixit, Avinash K, 1989. "Trade and Insurance with Adverse Selection," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 235-47, April.
  2. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  3. Kletzer, Kenneth & Bardhan, Pranab, 1986. "Credit Markets and Patterns of International Trade," Department of Economics, Working Paper Series qt1g36f3sd, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Grossman, G.M., 1998. "Imperfect Labour Contracts and International Trade," Papers 205, Princeton, Woodrow Wilson School - Public and International Affairs.
  5. Kyle Bagwell & R. Staiger, 1987. "The Role of Export Subsidies When Product Quality is Unknown," Discussion Papers 758, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Grossman, Gene M & Horn, Henrik, 1988. "Infant-Industry Protection Reconsidered: The Case of Informational Barriers to Entry," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 767-87, November.
  7. Bond, Eric W., 1986. "Entrepreneurial ability, income distribution, and international trade," Journal of International Economics, Elsevier, vol. 20(3-4), pages 343-356, May.
  8. 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.
  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.
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