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Endowment Versus Finance: A Wooden Barrel Theory of International Trade

  • Ju, Jiandong
  • Wei, Shang-Jin

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5109.

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Date of creation: Jun 2005
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Handle: RePEc:cpr:ceprdp:5109
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  1. Kenneth Kletzer and Pranab Bardhan., 1986. "Credit Markets and Patterns of International Trade," Economics Working Papers 8612, University of California at Berkeley.
  2. Kiminori Matsuyama, 2004. "Credit Market Imperfections and Patterns of International Trade and Capital Flows," CIRJE F-Series CIRJE-F-293, CIRJE, Faculty of Economics, University of Tokyo.
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    • La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
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