Credit Frictions, Selection into External Finance, and Gains from Trade

56 Pages Posted: 23 Jul 2019

Date Written: 2019

Abstract

This paper analyzes the effects of credit frictions in a trade model where heterogeneous firms select both into exporting and into two types of external finance. In our framework, small producers face stronger credit frictions, pay a higher borrowing rate and rely on bank finance, whereas large firms have access to cheaper bond finance. We show that an increase in credit frictions induces firms to select into bank finance, which attenuates the negative implications on product variety and welfare. In the open economy, the presence of effective financial intermediation increases the welfare gains from trade. In a counterfactual analysis, we exploit that our framework nests a model with credit frictions and one type of finance as a special case, and we show that endogenous selection into external finance is an important channel of adjustment.

Keywords: international trade, external finance, credit constraints, heterogeneous firms, moral hazard, bank and bond finance

JEL Classification: F120, G320, L110

Suggested Citation

Unger, Florian, Credit Frictions, Selection into External Finance, and Gains from Trade (2019). CESifo Working Paper No. 7641, Available at SSRN: https://ssrn.com/abstract=3422222 or http://dx.doi.org/10.2139/ssrn.3422222

Florian Unger (Contact Author)

University of Goettingen ( email )

Platz der Goettinger Sieben 3
Goettingen, Niedersachsen 37073
Germany

HOME PAGE: http://https://www.florian-unger.com

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