Harmful Procompetitive Effects of Trade in Presence of Credit Market Frictions

Author:

Foellmi, Reto  Oechslin, Manuel  

Journal:

JOURNAL OF MONEY CREDIT AND BANKING

Issue Date:

2020

Abstract(summary):

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 procompetitive 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.

Page:

1493---1525