Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/148029 
Year of Publication: 
2016
Series/Report no.: 
FIW Working Paper No. 162
Publisher: 
FIW - Research Centre International Economics, Vienna
Abstract: 
This paper develops a new international trade model with capital market imperfections and endogenous borrowing costs in general equilibrium. A key element of our model is that firm heterogeneity arises from the interaction of credit constraints at the firm-level with financial frictions at the country-level. Producers differ in pledgeability of sales which results in firm heterogeneity, if financial institutions are imperfect. We show that endogenous adjustments of capital costs represent a new channel that reduces common gains from globalization. Trade liberalization increases the borrowing rate, leads to a reallocation of market shares towards unconstrained producers and a larger fraction of credit-rationed firms. This increases the within-industry variance of, sales and reduces welfare gains as consumers dislike price heterogeneity. Our theory is consistent with new empirical patterns from World Bank firm-level data. We highlight that credit frictions are positively related to the degree of product market competition and to the variance of sales across firms.
Subjects: 
credit constraints
general equilibrium
globalization
imperfect capital markets
welfare
JEL: 
F10
F36
F61
L11
Document Type: 
Working Paper

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