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

69 Pages Posted: 25 Feb 2015

See all articles by Haichao Fan

Haichao Fan

Shanghai University of Finance and Economics - School of International Business Administration

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)

Date Written: February 23, 2015

Abstract

This paper presents theory and evidence from highly disaggregated Chinese data that tighter credit constrains force firms to produce lower quality. The paper modifies Melitz's (2003) model of trade with heterogeneous firms by introducing quality choice and credit constraints. The quality sorting model predicts that tighter credit constraints faced by a firm reduce its optimal prices due to its choice of lower-quality products. However, when quality cannot be chosen by a firm in an efficiency sorting model, there is an opposite prediction that prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data and a merged sample of large trading firms based on Chinese firm-level data from the National Bureau of Statistics of China (NBSC) and Chinese customs data strongly supports quality sorting and confirms the mechanism of quality adjustment: firms optimally choose to produce lower-quality products when facing tighter credit constraints. Moreover, the predictions of the efficiency sorting model are supported by using quality-adjusted prices in regression analysis and by using quality variation across firms within the same product.

Keywords: credit constraints, China, quality sorting, credit access, credit needs, quality, export prices, heterogeneous firms

JEL Classification: F1, F3, D2, G2, L1

Suggested Citation

Fan, Haichao and Lai, Edwin L.-C. and Li, Yao Amber, Credit Constraints, Quality, and Export Prices: Theory and Evidence from China (February 23, 2015). Journal of Comparative Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2568958

Haichao Fan

Shanghai University of Finance and Economics - School of International Business Administration ( email )

777 Guo-ding Road
Shanghai, 200433
China

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

HOME PAGE: http://yaoli.people.ust.hk/

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