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Credit constraints, quality, and export prices: Theory and evidence from China

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  • Fan, Haichao
  • Lai, Edwin L.-C.
  • Li, Yao Amber

Abstract

This paper presents theory and evidence from highly disaggregated Chinese data that tighter credit constrains force firms to produce lower quality. The paper modifies Melitz’s (2003) model of trade with heterogeneous firms by introducing quality choice and credit constraints. The quality sorting model predicts that tighter credit constraints faced by a firm reduce its optimal prices due to its choice of lower-quality products. However, when quality cannot be chosen by a firm in an efficiency sorting model, there is an opposite prediction that prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data and a merged sample of large trading firms based on Chinese firm-level data from the National Bureau of Statistics of China (NBSC) and Chinese customs data strongly supports quality sorting and confirms the mechanism of quality adjustment: firms optimally choose to produce lower-quality products when facing tighter credit constraints. Moreover, the predictions of the efficiency sorting model are supported by using quality-adjusted prices in regression analysis and by using quality variation across firms within the same product.

Suggested Citation

  • Fan, Haichao & Lai, Edwin L.-C. & Li, Yao Amber, 2015. "Credit constraints, quality, and export prices: Theory and evidence from China," Journal of Comparative Economics, Elsevier, vol. 43(2), pages 390-416.
    • Handle: RePEc:eee:jcecon:v:43:y:2015:i:2:p:390-416
    DOI: 10.1016/j.jce.2015.02.007
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    More about this item

    Keywords

    Credit constraints; Quality sorting; Credit access; Credit needs; Quality; Export prices;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance
    • D2 - Microeconomics - - Production and Organizations
    • G2 - Financial Economics - - Financial Institutions and Services
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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