Endowment Versus Finance: A Wooden Barrel Theory of International Trade

Shang-Jin Wei and Jiandong Ju

No 5109, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper develops a theory of international trade in which financial development and factor endowment jointly determine comparative advantage. We apply the financial contract model of Holmstrom and Tirole to the Heckscher-Ohlin-Samuelson (HOS) framework. A key result is what we call the law of a wooden barrel: if the external finance constraint is binding, then augmenting capital stock would have no effect on output and returns. On the other hand, if the external finance constraint is not binding, the standard HOS predictions are resuscitated.

Keywords: Financial development; Factor endowments; HOS model; Wooden Barrel (search for similar items in EconPapers)
JEL-codes: F11 G20 (search for similar items in EconPapers)
Date: 2005-06
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-int
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Citations: View citations in EconPapers (32)

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Working Paper: Endowment Versus Finance: A Wooden Barrel Theory of International Trade (2005)
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