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Discussion Paper Details

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Title: Endowment Versus Finance: A Wooden Barrel Theory of International Trade

Author(s): Jiandong Ju and Shang-Jin Wei

Publication Date: June 2005

Keyword(s): factor endowment, financial development, HOS model and wooden barrel

Programme Area(s): Institutions and Economic Performance and International Trade and Regional Economics

Abstract: This paper develops a theory of international trade in which financial development and factor endowment jointly determine comparative advantage. We apply the financial contract model of Holmstrom and Tirole to the Heckscher-Ohlin-Samuelson (HOS) framework. A key result is what we call the law of a wooden barrel: if the external finance constraint is binding, then augmenting capital stock would have no effect on output and returns. On the other hand, if the external finance constraint is not binding, the standard HOS predictions are resuscitated.

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Bibliographic Reference

Ju, J and Wei, S. 2005. 'Endowment Versus Finance: A Wooden Barrel Theory of International Trade'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5109