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Entrepreneurial Selection, Financial Markets, and Patterns of International Trade

Bin Xu

International Economic Journal, 2001, vol. 15, issue 3, 147-167

Abstract: This paper introduces entrepreneurial selection and imperfect financial markets to the 2x2x2 model of international trade. Entrepreneurs are heterogeneous in ability and borrow from banks who do not observe their ability. The pattern of international trade depends on (1) factor abundance, (2) endogenously determined productivity, and (3) endogenously determined financial market imperfections. We show that entrepreneurial selection results in a diminished Rybczynski effect and financial market imperfections further reduce the effect; hence differences in capital abundance imply a smaller trade volume than predicted by the Heckscher-Ohlin theorem. The results help to resolve a conflict between the Heckscher-Ohlin model and data. [F11]

Date: 2001
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DOI: 10.1080/10168730100000048

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