Discussion Paper Details

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

Author(s): Reto Foellmi and Manuel Oechslin

Publication Date: February 2019

Keyword(s): credit market frictions, International trade, Polarization and productivity

Programme Area(s): Industrial Organization, International Trade and Regional Economics and Labour Economics

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 pro-competitive 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.

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Bibliographic Reference

Foellmi, R and Oechslin, M. 2019. 'Harmful Pro-Competitive Effects of Trade in Presence of Credit Market Frictions'. London, Centre for Economic Policy Research.