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Credit Constraints, Quality, and Export Prices: Theory and Evidence from China

Haichao Fan, Edwin L.-C. Lai () and Yao Li ()
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Edwin L.-C. Lai: Department of Economics, Hong Kong University of Science and Technology

No 2015-02, HKUST IEMS Working Paper Series from HKUST Institute for Emerging Market Studies

Abstract: This paper presents theory and evidence that tighter credit constrains force firms to produce lower quality. The paper develops a quality sorting model that predicts that tighter credit constraints faced by a firm reduce its optimal prices due to its choice of lower-quality products. Conversely, when quality cannot be chosen by a firm in an efficiency sorting model, prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data and a merged sample based on Chinese firm-level data and Chinese customs data strongly supports quality sorting and confirms the mechanism of quality adjustment.

Keywords: credit constraints; China; quality sorting; credit access; credit needs; quality; export prices; heterogeneous firms (search for similar items in EconPapers)
JEL-codes: F1 F3 D2 G2 L1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna and nep-int
Date: 2015-01, Revised 2015-01
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http://iems.ust.hk/wp-content/uploads/2015/02/IEMSWP2015-02.pdf First version, 2015 (application/pdf)

Related works:
Journal Article: Credit constraints, quality, and export prices: Theory and evidence from China (2015) Downloads
Working Paper: Credit Constraints, Quality, and Export Prices: Theory and Evidence from China (2013) Downloads
Working Paper: Credit Constraints, Quality, and Export Prices: Theory and Evidence from China (2012) Downloads
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