Trade liberalization and credit constraints: Why opening up may fail to promote convergence

Katrin Peters and Monika Schnitzer ()

Canadian Journal of Economics, 2015, vol. 48, issue 3, 1099-1119

Abstract: This paper examines credit constraints as one channel held responsible for hampering economic convergence between countries. Specifically, we extend a Melitz and Ottaviano (2008) type trade model with variable mark-ups to allow for endogenous technology adoption. We consider a framework with two countries that potentially differ with respect to credit market development. Firms have the option to adopt a more efficient technology by paying some fixed cost that is more costly to finance for financially constrained firms. We find that technology adoption increases in both countries after trade liberalization but more so in the financially more developed country: the productivity gap widens. Simulations show that the welfare gap widens too. Opening up without sufficient access to external funding thus fails to promote convergence.

JEL-codes: F1 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (17)

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Related works:
Journal Article: Trade liberalization and credit constraints: Why opening up may fail to promote convergence (2015)
Working Paper: Trade liberalization and credit constraints: Why opening up may fail to promote convergence (2012)
Working Paper: Trade liberalization and credit constraints: Why opening up may fail to promote convergence (2012)
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