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Credit frictions, selection into external finance, and gains from trade

Author

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  • Florian Unger

Abstract

This paper analyzes the effects of credit frictions in a trade model where heterogeneous firms select both into exporting and into two types of external finance. In our framework, small producers face stronger credit frictions, pay a higher borrowing rate and rely on bank finance, whereas large firms have access to cheaper bond finance. We show that an increase in credit frictions induces firms to select into bank finance, which attenuates the negative implications on product variety and welfare. In the open economy, the presence of effective financial intermediation increases the welfare gains from trade. In a counterfactual analysis, we exploit that our framework nests a model with credit frictions and one type of finance as a special case, and we show that endogenous selection into external finance is an important channel of adjustment.

Suggested Citation

  • Florian Unger, 2019. "Credit frictions, selection into external finance, and gains from trade," CESifo Working Paper Series 7641, CESifo.
    • Handle: RePEc:ces:ceswps:_7641
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    Cited by:

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    2. Carsten Eckel & Florian Unger, 2023. "Credit Constraints, Endogenous Innovations, And Price Setting In International Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1715-1747, November.
    3. Reto Foellmi & Stefan Legge & Alexa Tiemann, 2021. "Innovation and trade in the presence of credit constraints," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1168-1205, November.
    4. Francesco Del Prato & Paolo Zacchia, 2025. "Gatekeeping, Selection, and Welfare," Papers 2505.24460, arXiv.org, revised Feb 2026.

    More about this item

    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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