Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/110653
Authors: 
Eckel, Carsten
Unger, Florian
Year of Publication: 
2015
Series/Report no.: 
Munich Discussion Paper 2015-8
Abstract: 
We introduce credit frictions motivated by moral hazard in a general equilibrium model of international trade with two dimensions of heterogeneity and endogenous investments. Firms' competitiveness consists of capabilities to conduct process and quality innovations at low costs, whereas investment outlays have to be financed by external capital. We show that the scope for vertical product differentiation in a sector determines how credit tightening affects investment and price setting. Consistent with recent empirical evidence, our model rationalizes positive as well as negative correlations of firm-level FOB prices with financial frictions and variable trade costs. Faced with an increase in the borrowing rate, producers reduce both types of innovation resulting in opposing effects on marginal production costs and prices. In general equilibrium, financial frictions intensify quality-based (cost-based) sorting of firms if the scope for vertical product differentiation is high (low). Consequently, credit tightening leads to firm exit, increased innovation activity among existing suppliers, and welfare losses that are larger in sectors with low investment intensity.
Subjects: 
international trade
external finance
credit constraints
moral hazard
quality
innovation
product prices
JEL: 
F12
G32
L11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
548.58 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.