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Finance, comparative advantage, and resource allocation

  • Jaud, Melise
  • Kukenova, Madina
  • Strieborny, Martin

The authors show that exported products exit the US market sooner if they violate the Heckscher-Ohlin notion of comparative advantage. Crucially, this pattern is stronger when exporting country has a well-developed banking system, measured by a high ratio of bank credit over the GDP. Banks thus push firms away from exports that are facing an uphill battle on a competitive foreign market due to a suboptimal use of the domestic factor endowment. The results imply a disciplining role for bank credit in terminating inefficient trade flows. This constitutes a new channel through which finance improves resource allocation in the real economy.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6111.

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Date of creation: 01 Jun 2012
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Handle: RePEc:wbk:wbrwps:6111
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