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Capital Market Imperfections and Trade Liberalization in General Equilibrium

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  • Irlacher, Michael
  • Unger, Florian

Abstract

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.

Suggested Citation

  • Irlacher, Michael & Unger, Florian, 2016. "Capital Market Imperfections and Trade Liberalization in General Equilibrium," Annual Conference 2016 (Augsburg): Demographic Change 145555, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145555
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Irlacher, Michael & Unger, Florian, 2018. "Capital market imperfections and trade liberalization in general equilibrium," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 402-423.

    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts

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