Asymmetric Effects of Financial Development on Export Price and Quality Across Countries

Abstract

We derive two novel predictions: financial development has a more pronounced effect on quality in countries with greater labor productivity, and its effect on export prices is U‐shaped in labor productivity. We confirm our predictions empirically and show that the negative effect of financial development on export prices is greatest in middle‐productivity countries, while its positive effect on quality is strongest in the most productive countries. Our findings contribute to the literature on the poverty trap: we argue that improving the quality of financial institutions alone is unlikely to boost quality or lower prices of the poorest countries.