Credit Constraints, Quality, and Export Prices: Theory and Evidence from China
71 Pages Posted: 19 May 2015
Date Written: November 1, 2014
This paper presents theory and evidence that tighter credit constrains force firms to produce lower quality. The paper develops a quality sorting model that predicts that tighter credit constraints faced by a firm reduce its optimal prices due to its choice of lower-quality products. Conversely, when quality cannot be chosen by a firm in an efficiency sorting model, prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data and a merged sample based on Chinese firm-level data and Chinese customs data strongly supports quality sorting and confirms the mechanism of quality adjustment.
Keywords: credit constraints, China, quality sorting, credit access, credit needs, quality, export prices, heterogeneous firms
JEL Classification: F1, F3, D2, G2, L1
Suggested Citation: Suggested Citation