Capital Market Imperfections and Trade Liberalization in General Equilibrium

Michael Irlacher and Florian Unger

No 162, FIW Working Paper series from FIW

Abstract: This paper develops a new international trade model with capital market imperfections and endogenous borrowing costs in general equilibrium. A key element of our model is that firm heterogeneity arises from the interaction of credit constraints at the firm-level with financial frictions at the country-level. Producers differ in pledgeability of sales which results in firm heterogeneity, if financial institutions are imperfect. We show that endogenous adjustments of capital costs represent a new channel that reduces common gains from globalization. Trade liberalization increases the borrowing rate, leads to a reallocation of market shares towards unconstrained producers and a larger fraction of credit-rationed firms. This increases the within-industry variance of, sales and reduces welfare gains as consumers dislike price heterogeneity. Our theory is consistent with new empirical patterns from World Bank firm-level data. We highlight that credit frictions are positively related to the degree of product market competition and to the variance of sales across firms.

Keywords: Credit constraints; General equilibrium; Globalization; Imperfect capital markets; Welfare (search for similar items in EconPapers)
JEL-codes: F10 F36 F61 L11 (search for similar items in EconPapers)
Pages: 47
Date: 2016-02
New Economics Papers: this item is included in nep-bec and nep-int
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Capital market imperfections and trade liberalization in general equilibrium (2018)
Working Paper: Capital market imperfections and trade liberalization in general equilibrium (2018)
Working Paper: Capital Market Imperfections and Trade Liberalization in General Equilibrium (2016)
Working Paper: Capital Market Imperfections and Trade Liberalization in General Equilibrium (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:wsr:wpaper:y:2016:i:162

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