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Harmful Pro-Competitive Effects of Trade in Presence of Credit Market Frictions

Reto Foellmi () and Manuel Oechslin ()

No 1904, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: We explore the consequences of international trade in an economy that encompasses technology choice and an endogenous distribution of mark-ups due to credit market frictions. We show that in such an environment a gradual opening of trade may – but not necessarily must – have a negative impact on productivity and overall output. The reason is that the procompetitive effects of trade reduce mark-ups and hence make access to credit more difficult for smaller firms. As a result, smaller firms – while not driven out of the market – may be forced to switch to less productive technologies.

Keywords: International trade; credit market frictions; productivity; polarization (search for similar items in EconPapers)
JEL-codes: O11 F13 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg and nep-int
Date: 2019-02
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