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

Listed author(s):
  • 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)

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.

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Paper provided by HKUST Institute for Emerging Market Studies in its series HKUST IEMS Working Paper Series with number 2015-02.

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Length: 71 pages
Date of creation: Jan 2015
Date of revision: Jan 2015
Handle: RePEc:hku:wpaper:201502
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