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

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  • Fan, Haichao
  • Lai, Edwin L.-C.
  • Li, Yao Amber

Abstract

This paper examines (i) the relationship between the credit constraints faced by a firm and the unit value prices of its exports, as well as (ii) the relationship between the export prices of a firm and its productivity. The paper extends Melitz's (2003) model of trade with heterogeneous firms by introducing endogenous quality, credit constraints and marketing costs. There are three key findings. First, there exists a positive relationship between firm productivity and export prices because the choice of higher-quality inputs is associated with higher productivity. Second, tighter credit constraints faced by a firm reduces its optimal prices as its choice of lower-quality inputs dominates the price distortion effect resulting from credit constraints. Third, if one adopts the alternative assumption that quality is exogenous across firms, then completely opposite results would be expected: there would be a negative relationship between prices and productivity; prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data, Chinese firm-level data from the National Bureau of Statistics of China (NBSC), and Chinese customs data strongly supports the predictions of the endogenous-quality model, and confirms the existence of the quality adjustment effect: firms optimally choose lower quality when facing tighter credit constraints. Our finding of a significant impact of credit constraints on export prices indicates the prevalence of heterogeneity of product quality across firms.

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  • Fan, Haichao & Lai, Edwin L.-C. & Li, Yao Amber, 2012. "Credit Constraints, Quality, and Export Prices: Theory and Evidence from China," MPRA Paper 40857, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:40857
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    Cited by:

    1. Haichao Fan & Yao Amber Li & Stephen R. Yeaple, 2015. "Trade Liberalization, Quality, and Export Prices," The Review of Economics and Statistics, MIT Press, vol. 97(5), pages 1033-1051, December.
    2. Eckel, Carsten & Unger, Florian, 2015. "Credit constraints, endogenous innovations, and price setting in international trade," Discussion Papers in Economics 24858, University of Munich, Department of Economics.
    3. Yao Amber Li & Chen Carol Zhao, 2016. "Price Adjustment to Exchange Rates and Forward-looking Exporters: Evidence from USA–China Trade," Review of International Economics, Wiley Blackwell, vol. 24(5), pages 1023-1049, November.
    4. Haichao Fan & Yao Amber Li & Tuan Anh Luong, 2015. "Input-Trade Liberalization and Markups," HKUST IEMS Working Paper Series 2015-26, HKUST Institute for Emerging Market Studies, revised May 2015.
    5. Sarah Guillou & Michel Bernini & Flora Bellone, 2013. "Firms' leverage and export quality evidence from France," Sciences Po publications 2013-13, Sciences Po.
    6. Haichao Fan & Yao Amber Li & Stephen R. Yeaple, 2017. "On the Relationship Between Quality and Productivity: Evidence from China's Accession to the WTO," HKUST IEMS Working Paper Series 2017-46, HKUST Institute for Emerging Market Studies, revised Oct 2017.
    7. ByeongHwa Choi & Volodymyr Lugovskyy, 2015. "Positive and Negative Effects of Financial Development on Export Prices," Caepr Working Papers 2015-020 Classification-F, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
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    9. Hu, Cui & Tan, Yong, 2017. "Learning to Import From Neighbors," MPRA Paper 78108, University Library of Munich, Germany.
    10. Joachim Wagner, 2016. "A survey of empirical studies using transaction level data on exports and imports," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(1), pages 215-225, February.
    11. Angelo Secchi & Federico Tamagni & Chiara Tomasi, 2016. "Export price adjustments under financial constraints," Canadian Journal of Economics, Canadian Economics Association, vol. 49(3), pages 1057-1085, August.
    12. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4sr364g4 is not listed on IDEAS
    13. Ciani, Andrea & Bartoli, Francesca, 2015. "Export quality upgrading under credit constraints," DICE Discussion Papers 191, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    14. Crinò, Rosario & Ogliari, Laura, 2015. "Financial Frictions, Product Quality, and International Trade," CEPR Discussion Papers 10555, C.E.P.R. Discussion Papers.
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    16. Crinò, Rosario & Ogliari, Laura, 2017. "Financial imperfections, product quality, and international trade," Journal of International Economics, Elsevier, vol. 104(C), pages 63-84.
    17. repec:eee:chieco:v:45:y:2017:i:c:p:168-194 is not listed on IDEAS
    18. Wang, Chenguang & Oppedahl, David, 2015. "Low Access to Credit Decreases Asset Prices - Evidence from a Quasi-Experiment in Agriculture," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205127, Agricultural and Applied Economics Association;Western Agricultural Economics Association.
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    More about this item

    Keywords

    credit constraints; credit access; credit needs; endogenous quality; export prices; quality; heterogeneous firms; productivity;

    JEL classification:

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

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