Credit frictions, selection into external finance and gains from trade

Abstract

This paper analyzes the effects of credit frictions in a trade model where heterogeneous firms select both into exporting and into two types of external finance. While small producers face stronger credit frictions and rely on bank finance, large firms have access to cheaper bond finance. The analysis shows that a bank credit shock leads to an increase in the share of firms that use bond finance. This selection effect is used to explain the observed decrease in bank finance relative to bond finance during the global financial crisis of 2007–2009. A calibration of the model to the crisis period documents that endogenous selection into external finance reduces the negative implications of credit frictions on product variety, exports and gains from trade.

Credit Constraints, Endogenous Innovations, and Price Setting in International Trade

“…In this 29 Credit frictions also negatively affect the decision to export (Berman and Héricourt, 2010;Minetti and Zhu, 2011). During the financial crisis 2008-9, the number of exported varieties declined, which can be explained by a credit shock that aggravated access to finance (Unger, 2021). 30 We follow Egger and Keuschnigg (2015, 2017) who consider real income as welfare measure in related frameworks with credit frictions and moral hazard.…”

Financial Development and Export Concentration

“…I abstract from different sources of external credit Cho et al (2019). andUnger (2021) analyze the selection of heterogeneous exporters into bond and bank finance.10 Manova (2013) assumes that investors can seize a fraction of fixed entry costs f E as collateral in case of default. For the sake of analytical tractability, I express the collateral as a share of innovation costs.…”

Innovation and trade in the presence of credit constraints

“…Alternatively, we can assume that the lender can recover only a fraction λ of current profits in case the entrepreneur defaults. Note that we abstain from different types of credit as discussed inUnger (2021).…”