Arbeitspapier

Credit frictions, selection into external finance, and gains from trade

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.

Language
Englisch

Bibliographic citation
Series: CESifo Working Paper ; No. 7641

Classification
Wirtschaft
Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Production, Pricing, and Market Structure; Size Distribution of Firms
Subject
international trade
external finance
credit constraints
heterogeneous firms
moral hazard
bank and bond finance

Event
Geistige Schöpfung
(who)
Unger, Florian
Event
Veröffentlichung
(who)
Center for Economic Studies and ifo Institute (CESifo)
(where)
Munich
(when)
2019

Handle
Last update
10.03.2025, 11:44 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Unger, Florian
  • Center for Economic Studies and ifo Institute (CESifo)

Time of origin

  • 2019

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