Credit Constraints, Quality, and Export Prices: Theory and Evidence from China

Haichao Fan, Edwin Lai (elai@ust.hk) and Yao Li

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines (i) the relationship between the credit constraints faced by a firm and the unit value prices of its exports, as well as (ii) the relationship between the export prices of a firm and its productivity. The paper extends Melitz's (2003) model of trade with heterogeneous firms by introducing endogenous quality, credit constraints and marketing costs. There are three key findings. First, there exists a positive relationship between firm productivity and export prices because the choice of higher-quality inputs is associated with higher productivity. Second, tighter credit constraints faced by a firm reduces its optimal prices as its choice of lower-quality inputs dominates the price distortion effect resulting from credit constraints. Third, if one adopts the alternative assumption that quality is exogenous across firms, then completely opposite results would be expected: there would be a negative relationship between prices and productivity; prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data, Chinese firm-level data from the National Bureau of Statistics of China (NBSC), and Chinese customs data strongly supports the predictions of the endogenous-quality model, and confirms the existence of the quality adjustment effect: firms optimally choose lower quality when facing tighter credit constraints. Our finding of a significant impact of credit constraints on export prices indicates the prevalence of heterogeneity of product quality across firms.

Keywords: credit constraints; credit access; credit needs; endogenous quality; export prices; quality; heterogeneous firms; productivity (search for similar items in EconPapers)
JEL-codes: D2 F1 G2 L1 (search for similar items in EconPapers)
Date: 2012-08-01
New Economics Papers: this item is included in nep-bec, nep-dev, nep-eff, nep-int and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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https://mpra.ub.uni-muenchen.de/40857/1/MPRA_paper_40857.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/43511/2/MPRA_paper_43511.pdf revised version (application/pdf)
https://mpra.ub.uni-muenchen.de/52316/9/MPRA_paper_52316.pdf revised version (application/pdf)

Related works:
Journal Article: Credit constraints, quality, and export prices: Theory and evidence from China (2015)
Working Paper: Credit Constraints, Quality, and Export Prices: Theory and Evidence from China (2015)
Working Paper: Credit Constraints, Quality, and Export Prices: Theory and Evidence from China (2013)
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