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Heterogenous firms and credit frictions: a general equilibrium analysis of market entry decisions

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  • Sara Formai

    (Bank of Italy)

Abstract

This paper develops a general equilibrium model of international trade with heterogeneous firms and imperfect credit markets. To finance the costs for product innovation and domestic and foreign market entry, firms must raise external capital. The model underscores the importance of considering a general equilibrium setting in order to characterize fully the misallocations of resources that stem from the existence of credit frictions. These have important implications for firms' entry decisions in the different markets and for the welfare effects of imperfect financial institutions. Allowing for liquidity-constrained firms and imperfect credit markets alters, and in some cases reverses, some of the main results from the literature on heterogeneous firms. In particular, the model predicts that trade liberalization does not necessarily lead to an increase in average productivity and consumers' welfare.

Suggested Citation

  • Sara Formai, 2013. "Heterogenous firms and credit frictions: a general equilibrium analysis of market entry decisions," Temi di discussione (Economic working papers) 940, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_940_13
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2013/2013-0940/en_tema_940.pdf
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    References listed on IDEAS

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    2. Del Gatto, Massimo & Mion, Giordano & Ottaviano, Gianmarco I.P., 2006. "Trade Integration, Firm Selection and the Costs of Non-Europe," Conference papers 331548, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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    5. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
    6. Peter Gustafsson & Paul Segerstrom, 2010. "Trade Liberalization and Productivity Growth," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 207-228, May.
    7. Berman, Nicolas & Héricourt, Jérôme, 2010. "Financial factors and the margins of trade: Evidence from cross-country firm-level data," Journal of Development Economics, Elsevier, vol. 93(2), pages 206-217, November.
    8. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
    9. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(1), pages 31-66.
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    11. J. N. Bhagwati, 1969. "The Generalized Theory of Distortions and Welfare," Working papers 39, Massachusetts Institute of Technology (MIT), Department of Economics.
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    Citations

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    Cited by:

    1. Molina, Danielken & Roa, Monica, 2014. "The Effect of Credit on the Export Performance of Colombian Exporters," MPRA Paper 56137, University Library of Munich, Germany.
    2. Molina, Danielken & Roa, Monica, 2014. "The Effect of Credit on the Export Performance of Colombian Exporters," MPRA Paper 56137, University Library of Munich, Germany.
    3. repec:wsr:wpaper:y:2016:i:162 is not listed on IDEAS
    4. Irlacher, Michael & Unger, Florian, 2018. "Capital market imperfections and trade liberalization in general equilibrium," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 402-423.

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    More about this item

    Keywords

    consumer welfare; credit frictions; heterogeneous firms; market entry; trade liberalization;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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