DP13538 Harmful Pro-Competitive Effects of Trade in Presence of Credit Market Frictions

Author(s): Reto Foellmi, Manuel Oechslin
Publication Date: February 2019
Date Revised: February 2019
Keyword(s): credit market frictions, International trade, Polarization, productivity
JEL(s): F13, O11, O16
Programme Areas: Labour Economics, Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13538

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.