Positive and Negative Effects of Financial Development on Export Prices

32 Pages Posted: 5 Dec 2015 Last revised: 4 Feb 2016

See all articles by ByeongHwa Choi

ByeongHwa Choi

Indiana University

Volodymyr Lugovskyy

Indiana University Bloomington - Department of Economics

Date Written: October 1, 2015

Abstract

We present a model of international trade in which credit constrained firms endogenously choose quality and countries differ in their level of financial development. This model produces a novel result where the total effect of financial development on export prices exhibits a U-shaped relationship with the exporter's labor productivity. The effect is positive for countries with the lowest and highest levels of productivity and negative for the countries in the middle. This occurs because financial development has two opposing effects on export prices: it reduces the costs of production while enabling costly quality upgrading. We confirm this pattern using a sample of U.S. imports from all exporters worldwide. This finding suggests that financial development has different implications for countries with different levels of productivity and income.

Keywords: Financial development, Quality, Export prices, Labor productivity

JEL Classification: F10, F14, G20, J24, O14

Suggested Citation

Choi, ByeongHwa and Lugovskyy, Volodymyr, Positive and Negative Effects of Financial Development on Export Prices (October 1, 2015). Available at SSRN: https://ssrn.com/abstract=2698243 or http://dx.doi.org/10.2139/ssrn.2698243

ByeongHwa Choi

Indiana University ( email )

Wylie Hall 105
100 South Woodlawn
Bloomington, IN 47405
United States

Volodymyr Lugovskyy (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

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