Financial Frictions, Product Quality, and International Trade

46 Pages Posted: 27 Apr 2015

See all articles by Rosario Crinò

Rosario Crinò

University of Bergamo - Department of Economics

Laura Ogliari

Bocconi University

Date Written: April 2015

Abstract

An influential literature has documented large differences across countries and industries in terms of product quality. It is important to understand the determinants of these differences, because the production of high-quality goods influences key aspects of economic performance. In this paper, we propose and test an explanation that rests on the interplay between cross-country differences in financial frictions and cross-industry differences in financial vulnerability. We organize the empirical analysis around a trade model with heterogeneous firms, endogenous output quality, country heterogeneity in financial frictions, and industry heterogeneity in financial vulnerability. We estimate the model using novel and unusually rich data on export quality, financial development, and financial vulnerability, covering all manufacturing industries and countries in the world over the last three decades. Our results show that the interplay between financial frictions and financial vulnerability is a first-order determinant of the observed variation in product quality across countries and industries. We also show that quality adjustments are a key channel through which financial development affects international trade and shapes the industrial composition of countries' exports.

Keywords: Credit Market Imperfections, Export Structure, Financial Vulnerability, Product Quality

JEL Classification: F14, F36, G20

Suggested Citation

Crinò, Rosario and Ogliari, Laura, Financial Frictions, Product Quality, and International Trade (April 2015). CEPR Discussion Paper No. DP10555, Available at SSRN: https://ssrn.com/abstract=2599527

Rosario Crinò (Contact Author)

University of Bergamo - Department of Economics ( email )

Piazza Rosate 2
I-24100 Bergamo, 24127
Italy

Laura Ogliari

Bocconi University ( email )

Via Sarfatti, 25
Milan, 20136
Italy

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