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Trade, Finance and Endogenous Firm Heterogeneity

Rosario Crino (), Gino Gancia () and Alessandra Bonfiglioli ()

No 342, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We study how financial frictions affect firm-level heterogeneity and trade in a model where productivity differences across monopolistically competitive firms are endogenous and depend on investment decisions at the entry stage. By increasing entry costs, financial frictions reduce the exit cutoff thereby lowering the value of investing in bigger projects with more dispersed outcomes. Hence, credit frictions make firms more homogeneous and hinder the volume of exports both along the intensive and the extensive margin. Export opportunities, instead, shift expected profits to the tail and increase the value of technological heterogeneity. We test these predictions using comparable measures of sale dispersion within 365 manufacturing industries in 119 countries, built from highly disaggregated US import data. Consistent with the model, financial development increases sale dispersion, especially in more financially vulnerable industries; sale dispersion is also increasing in measures of comparative advantage. These results are quantitatively important for explaining the effect of financial development and factor endowments on export sales.

Date: 2016
New Economics Papers: this item is included in nep-bec, nep-cse, nep-int and nep-ppm
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https://economicdynamics.org/meetpapers/2016/paper_342.pdf (application/pdf)

Related works:
Journal Article: Trade, Finance, and Endogenous Firm Heterogeneity (2019) Downloads
Working Paper: Trade, finance and endogenous firm heterogeneity (2017) Downloads
Working Paper: Trade, Finance and Endogenous Firm Heterogeneity (2016) Downloads
Working Paper: Trade, Finance and Endogenous Firm Heterogeneity (2016) Downloads
Working Paper: Trade, Finance and Endogenous Firm Heterogeneity (2015) Downloads
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