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

71 Pages Posted: 19 May 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: November 1, 2014

Abstract

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

Fan, Haichao and Lai, Edwin L.-C. and Li, Yao Amber, Credit Constraints, Quality, and Export Prices: Theory and Evidence from China (November 1, 2014). HKUST IEMS Working Paper No. 2015-02. Available at SSRN: https://ssrn.com/abstract=2607388 or http://dx.doi.org/10.2139/ssrn.2607388

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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