The Competitive Effects of Credit Constraints in the Global Economy

22 Pages Posted: 17 Sep 2018

See all articles by Peter H. Egger

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Sebastian Kunert

University of Duisburg-Essen

Tobias Seidel

University of Duisburg-Essen - Mercator School of Management

Date Written: October 2018

Abstract

As credit constraints exclude some firms from external finance and thus from market entry, they affect prices and markups by altering the degree of competition. Lower credit constraints allow less productive firms to enter with the following consequences. On the one hand, more competition tends to reduce average prices, but on the other hand, less productive firms charge above‐average prices. The overall effect is thus ambiguous. We therefore formulate and structurally estimate a quantitative multi‐country version of the model to gauge the direction and magnitude of the effects of credit constraints in a model with variable firm‐specific markups over marginal costs. In a sample of 11 European countries’ manufacturing sectors between 2000 and 2005, we find that an abolishment of credit constraints reduces markups by about 6.1% on average, while average prices are predicted to increase by 1.6%. The latter indicates that the effect of credit constraints on productivity dominates the one on competition.

Suggested Citation

Egger, Peter H. and Kunert, Sebastian and Seidel, Tobias, The Competitive Effects of Credit Constraints in the Global Economy (October 2018). Economica, Vol. 85, Issue 340, pp. 771-792, 2018. Available at SSRN: https://ssrn.com/abstract=3246021 or http://dx.doi.org/10.1111/ecca.12251

Peter H. Egger (Contact Author)

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

Poschingerstr. 5
Munich, DE-81679
Germany
+49 0 89 9224 1238 (Phone)
+49 0 89 985369 (Fax)

HOME PAGE: http://www.cesifo-group.de/portal/page?_pageid=36,425628&_dad=portal&_schema=PORTAL

Ludwig-Maximilians University of Munich

Schackstr. 4
Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Poschinger Str. 5
Munich, DE-81679
Germany

Sebastian Kunert

University of Duisburg-Essen

Lotharstrasse 1
Duisburg, 47048
Germany

Tobias Seidel

University of Duisburg-Essen - Mercator School of Management ( email )

Lotharstraße 65
Duisburg, Nordrhein-Westfalen 47057
Germany

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