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Trade and financial liberalization with asymmetric information in bank financing

Bin Xu

Journal of Economic Policy Reform, 2003, vol. 6, issue 2, 57-69

Abstract: We investigate trade and financial openness in a small developing country where entrepreneurs need bank financing to operate in an import‐competing sector but banks do not observe their ability. This informational asymmetry causes adverse selection of low‐ability individuals into entrepreneurship and also prevents poor but able individuals from being entrepreneurs. We find that trade opening improves national welfare, but a tax is needed on foreign financial capital. Trade opening reduces an income gap between the rich and the poor, while financial opening affects this income gap ambiguously.

Date: 2003
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DOI: 10.1080/1384128032000145297

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