Capital market imperfections and trade liberalization in general equilibrium

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This paper develops a new international trade model with firm-specific credit frictions and endogenous borrowing costs in general equilibrium. We highlight new implications of globalization when general equilibrium effects on capital markets are present. In particular, we show that globalization increases the share of financially constrained firms and affects producers very differently depending on their exposure to credit frictions. While the positive effect of globalization dominates for unconstrained firms, higher borrowing costs and tougher competition especially hurt credit-rationed producers. We show that these new adjustments increase the heterogeneity among firms and reduce welfare gains from trade. Our theory is consistent with new empirical patterns from World Bank firm-level data. We show that credit frictions are positively related to the degree of product competition and to the variance of sales across firms.

Original languageEnglish
JournalJournal of Economic Behavior and Organization
Pages (from-to)402-423
Number of pages22
Publication statusPublished - 01.2018
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2017 Elsevier B.V.

    Research areas

  • Credit constraints, General equilibrium, Globalization, Imperfect capital markets, Welfare
  • Economics