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

Sara Formai ()
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Sara Formai: Bank of Italy

No 940, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: consumer welfare; credit frictions; heterogeneous firms; market entry; trade liberalization (search for similar items in EconPapers)
JEL-codes: F12 F36 G20 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-bec, nep-dge, nep-int and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_940_13

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