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Capital Market Imperfections and Trade Liberalization in General Equilibrium

Listed author(s):
  • Irlacher, Michael
  • Unger, Florian

This paper develops a new international trade model with capital market imperfections and endogenous borrowing costs in general equilibrium. A key element of our model is that firm heterogeneity arises from the interaction of credit constraints at the firm-level with financial frictions at the country-level. Producers differ in pledgeability of sales which results in firm heterogeneity, if financial institutions are imperfect. We show that endogenous adjustments of capital costs represent a new channel that reduces common gains from globalization. Trade liberalization increases the borrowing rate, leads to a reallocation of market shares towards unconstrained producers and a larger fraction of credit-rationed firms. This increases the within-industry variance of sales and reduces welfare gains as consumers dislike price heterogeneity. Our theory is consistent with new empirical patterns from World Bank firm-level data. We highlight that credit frictions are positively related to the degree of product market competition, and to the variance of sales across firms.

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File URL: https://www.econstor.eu/bitstream/10419/145555/1/VfS_2016_pid_6390.pdf
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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2016 (Augsburg): Demographic Change with number 145555.

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Date of creation: 2016
Handle: RePEc:zbw:vfsc16:145555
Contact details of provider: Web page: http://www.socialpolitik.org/
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