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Credit Constraints, Quality, and Export Prices: Theory and Evidence from China

Author

Listed:
  • Haichao Fan

    (School of International Business Administration, Shanghai University of Finance and Economics)

  • Edwin L.-C. Lai

    (Department of Economics, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

  • Yao Amber Li

    (Department of Economics, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

Abstract

This paper presents theory and evidence that tighter credit constrains force firms to produce lower quality. The paper develops a quality sorting model that predicts that tighter credit constraints faced by a firm reduce its optimal prices due to its choice of lower-quality products. Conversely, when quality cannot be chosen by a firm in an efficiency sorting model, prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data and a merged sample based on Chinese firm-level data and Chinese customs data strongly supports quality sorting and confirms the mechanism of quality adjustment.

Suggested Citation

  • Haichao Fan & Edwin L.-C. Lai & Yao Amber Li, 2015. "Credit Constraints, Quality, and Export Prices: Theory and Evidence from China," HKUST IEMS Working Paper Series 2015-02, HKUST Institute for Emerging Market Studies, revised Jan 2015.
  • Handle: RePEc:hku:wpaper:201502
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    References listed on IDEAS

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    More about this item

    Keywords

    credit constraints; China; quality sorting; credit access; credit needs; quality; export prices; heterogeneous firms;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance
    • D2 - Microeconomics - - Production and Organizations
    • G2 - Financial Economics - - Financial Institutions and Services
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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