Citation

Discussion Paper Details

Please find the details for DP11727 in an easy to copy and paste format below:

Full Details

Title: Credit constraints, endogenous innovations, and price setting in international trade

Author(s): Carsten Eckel and Florian Unger

Publication Date: December 2016

Keyword(s): credit constraints, external finance, innovation, International Trade, moral hazard, product prices and Quality

Programme Area(s): International Trade and Regional Economics

Abstract: This paper analyzes the effects of credit frictions on within-firm adjustments and selection into exporting when both cost-based productivity and product quality matter for the success of a producer. Our model shows that whether FOB prices are positively or negatively correlated with credit frictions and variable trade costs depends on the sectoral R&D intensity. If the latter is high, prices decrease in credit and trade costs, and vice versa. Furthermore, we show that the aggregate effects of financial shocks also depend on the R&D intensity. Stronger credit frictions lead to firm exit, inefficiently high innovation activity among existing suppliers, and welfare losses that are larger in sectors with low R&D intensity. To analyze the effects of credit frictions, we allow for both cost-based and quality-based sorting in a general equilibrium model of international trade. Producers differ in capabilities to conduct process and quality innovations, and external finance is needed for investments.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11727

Bibliographic Reference

Eckel, C and Unger, F. 2016. 'Credit constraints, endogenous innovations, and price setting in international trade'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11727