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

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This article analyzes the role of credit frictions in a trade model where producers differ in their capabilities to conduct process and quality innovations and require external finance for investments. Accounting for cost-based and quality-based sorting of firms in a unified framework allows us to demonstrate that the reactions of prices and commonly used productivity measures do not necessarily reflect welfare implications. Credit frictions lead to distortions through aggravated access to finance and endogenous price adjustments so that the responses of quantity-based and revenue-based productivity differ substantially. In counterfactual scenarios, we show that these differential effects are quantitatively important.

Original languageEnglish
JournalInternational Economic Review
Issue number4
Pages (from-to)1715-1747
Number of pages33
Publication statusPublished - 11.2023
Externally publishedYes

Bibliographical note

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© 2023 The Authors. International Economic Review published by Wiley Periodicals LLC on behalf of the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.