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

50 Pages Posted: 4 Sep 2013

See all articles by Haichao Fan

Haichao Fan

Hong Kong University of Science & Technology (HKUST)

Edwin L.-C. Lai

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Yao Amber Li

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies)

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Date Written: August 30, 2013

Abstract

This paper examines the relationship between the credit constraints faced by a firm and the unit value prices of its exports. The paper modifies Arkolakis’s (2010) model of trade with heterogeneous firms by introducing endogenous quality and credit constraints. The model predicts that tighter credit constraints faced by a firm reduce its optimal prices as its choice of lower-quality products dominates the price distortion effect resulting from credit constraints. However, a competing theory based on the alternative assumption that quality is exogenous across firms would predict completely opposite results: 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. Moreover, the predictions of the exogenous-quality model are supported by using quality-adjusted prices in regression analysis. In addition, we confirm the mechanism of quality adjustment: firms optimally choose to produce lower-quality products when facing tighter credit constraints.

Keywords: credit constraints, credit access, credit needs, endogenous quality, export prices, quality, heterogeneous firms, productivity

JEL Classification: F100, F300, D200, G200, L100

Suggested Citation

Fan, Haichao and Lai, Edwin L.-C. and Li, Yao Amber, Credit Constraints, Quality, and Export Prices: Theory and Evidence from China (August 30, 2013). CESifo Working Paper Series No. 4370. Available at SSRN: https://ssrn.com/abstract=2319845

Haichao Fan

Hong Kong University of Science & Technology (HKUST) ( email )

Department of Economics
Clear Water Bay
Kowloon, 999999
Hong Kong

Edwin L.-C. Lai

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Yao Amber Li (Contact Author)

Hong Kong University of Science and Technology - School of Business and Management, Department of Economics; HKUST IEMS (Institute for Emerging Market Studies) ( email )

Department of Economics, Hong Kong U of Sci&Tech
Clear Water Bay, Kowloon, Hong Kong SAR, China
Kowloon
Hong Kong

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