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Trade, Finance and Endogenous Firm Heterogeneity

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  • Alessandra Bonfiglioli
  • Rosario Crinò
  • Gino Gancia

Abstract

We study how financial frictions affect firm-level heterogeneity and trade. We build a model where productivity differences across monopolistically competitive firms are endogenous and depend on investment decisions at the entry stage. By increasing entry costs, financial frictions lower the exit cutoff and hence the value of investing in bigger projects with more dispersed outcomes. As a result, credit frictions make firms smaller and more homogeneous, and hinder the volume of exports. Export opportunities, instead, shift expected profits to the tail and increase the value of technological heterogeneity. We test these predictions using comparable measures of sales dispersion within 365 manufacturing industries in 119 countries, built from highly disaggregated US import data. Consistent with the model, financial development increases sales dispersion, especially in more financially vulnerable industries; sales dispersion is also increasing in measures of comparative advantage. These results can be important for explaining the effect of financial development and factor endowments on export sales.

Suggested Citation

  • Alessandra Bonfiglioli & Rosario Crinò & Gino Gancia, 2015. "Trade, Finance and Endogenous Firm Heterogeneity," Working Papers 863, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:863
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    References listed on IDEAS

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    Cited by:

    1. Alessandra Bonfiglioli & Rosario Crinò & Gino Gancia, 2018. "Firms and Economic Performance: A view from Trade," Working Papers 1034, Barcelona Graduate School of Economics.
    2. Alessandra Bonfiglioli & Gino Gancia, 2019. "Heterogeneity, selection and labor market disparities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 31, pages 305-325, January.
    3. Masashige Hamano & Francesco Zanetti, 2017. "Endogenous Turnover and Macroeconomic Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 263-279, October.
    4. P. Beaumont, 2017. "Time is Money: Cash-Flow Risk and Export Market Behavior," Documents de Travail de l'Insee - INSEE Working Papers g2017-10, Institut National de la Statistique et des Etudes Economiques.

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    More about this item

    Keywords

    financial development; firm heterogeneity; international trade;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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