Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/110648
Authors: 
Irlacher, Michael
Unger, Florian
Year of Publication: 
2015
Series/Report no.: 
Munich Discussion Paper 2015-6
Abstract: 
This paper develops a new international trade model with capital market imperfections and endogenous borrowing costs in general equilibrium. Our theoretical model is motivated by new empirical patterns from enterprise survey data of the World Bank. Observing that a substantial fraction of the variation in financial constraints is across firms within industries, we allow for firm-specific exposure to financial constraints. This leads to credit rationing and divides producers into financially constrained and unconstrained ones. We show that endogenous adjustments of capital costs represent a new channel that reduces common gains from globalization. Trade liberalization increases the demand for capital and thus the borrowing rate. This leads to a reallocation of market shares towards financially unconstrained producers and a larger fraction of credit-rationed firms. Both effects increase the within-industry variance of firm outcomes and reduce welfare gains as consumers dislike heterogeneity in prices.
Subjects: 
Credit constraints
General equilibrium
Globalization
Imperfect capital markets
Welfare
JEL: 
F10
F36
F61
L11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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