Credit constraints, endogenous innovations, and price setting in international trade

Carsten Eckel and Florian Unger

No 11727, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyzes the effects of credit frictions on within-firm adjustments and selection into exporting when both cost-based productivity and product quality matter for the success of a producer. Our model shows that whether FOB prices are positively or negatively correlated with credit frictions and variable trade costs depends on the sectoral R&D intensity. If the latter is high, prices decrease in credit and trade costs, and vice versa. Furthermore, we show that the aggregate effects of financial shocks also depend on the R&D intensity. Stronger credit frictions lead to firm exit, inefficiently high innovation activity among existing suppliers, and welfare losses that are larger in sectors with low R&D intensity. To analyze the effects of credit frictions, we allow for both cost-based and quality-based sorting in a general equilibrium model of international trade. Producers differ in capabilities to conduct process and quality innovations, and external finance is needed for investments.

Keywords: International trade; External finance; Credit constraints; Moral hazard; Quality; Innovation; Product prices (search for similar items in EconPapers)
JEL-codes: F12 G32 L11 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-ino and nep-int
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Citations: View citations in EconPapers (2)

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Working Paper: Credit constraints, endogenous innovations, and price setting in international trade (2015)
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