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Endowment Versus Finance: A Wooden Barrel Theory of International Trade

Author

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  • Ju, Jiandong
  • Wei, Shang-Jin

Abstract

This paper develops a theory of international trade in which financial development and factor endowment jointly determine comparative advantage. We apply the financial contract model of Holmstrom and Tirole to the Heckscher-Ohlin-Samuelson (HOS) framework. A key result is what we call the law of a wooden barrel: if the external finance constraint is binding, then augmenting capital stock would have no effect on output and returns. On the other hand, if the external finance constraint is not binding, the standard HOS predictions are resuscitated.

Suggested Citation

  • Ju, Jiandong & Wei, Shang-Jin, 2005. "Endowment Versus Finance: A Wooden Barrel Theory of International Trade," CEPR Discussion Papers 5109, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5109
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    Cited by:

    1. Iacovone, Leonardo & Zavacka, Veronika, 2009. "Banking crises and exports : lessons from the past," Policy Research Working Paper Series 5016, The World Bank.
    2. Marianna Belloc & Samuel Bowles, 2009. "International Trade, Factor Mobility and the Persistence of Cultural-Institutional Diversity," UMASS Amherst Economics Working Papers 2009-08, University of Massachusetts Amherst, Department of Economics.
    3. Jaud Melise , & Kukenova Madina & Strieborny Martin, 2010. "Finance, Comparative Advantage, and Resource Allocation," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 10.16, Université de Lausanne, Faculté des HEC, DEEP.
    4. Ju, Jiandong & Wei, Shang-Jin, 2011. "When is quality of financial system a source of comparative advantage?," Journal of International Economics, Elsevier, vol. 84(2), pages 178-187, July.
    5. Jiandong Ju & Shang-Jin Wei, 2006. "A Solution to Two Paradoxes of International Capital Flows," NBER Working Papers 12668, National Bureau of Economic Research, Inc.
    6. Pol Antràs & Ricardo J. Caballero, 2009. "Trade and Capital Flows: A Financial Frictions Perspective," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 701-744, August.
    7. Dingming Liu & Pu Chen & Chunyang Wang, 2015. "How Local Financial Market Conditions, Interest Rates, and Productivity Relate to Decisions to Export," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 315-334, November.
    8. Yongfu Huang & Jonathan Temple, 2005. "Does external trade promote financial development?," Bristol Economics Discussion Papers 05/575, Department of Economics, University of Bristol, UK.
    9. Rafael Cezar, 2012. "Le développement financier et les avantages commerciaux," Working Papers DT/2012/19, DIAL (Développement, Institutions et Mondialisation).
    10. Do, Quy-Toan & Levchenko, Andrei A., 2007. "Comparative advantage, demand for external finance, and financial development," Journal of Financial Economics, Elsevier, vol. 86(3), pages 796-834, December.
    11. Christian Keuschnigg & Evelyn Ribi, 2010. "Business Taxation, Corporate Finance and Economic Performance," University of St. Gallen Department of Economics working paper series 2010 2010-04, Department of Economics, University of St. Gallen.

    More about this item

    Keywords

    factor endowment; financial development; HOS model; wooden barrel;

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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