Working Paper: CEPR ID: DP13538
Authors: Reto Foellmi; Manuel Oechslin
Abstract: 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.
Keywords: International Trade; Credit Market Frictions; Productivity; Polarization
JEL Codes: O11; F13; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| degree of trade openness (F10) | productivity (O49) |
| degree of trade openness (F10) | markups (D43) |
| markups (D43) | borrowing capacity of smaller firms (D25) |
| borrowing capacity of smaller firms (D25) | productivity (O49) |
| reduced borrowing capacity (G32) | less productive technologies (O49) |
| less productive technologies (O49) | average productivity (O49) |
| lower output from price-constrained firms (D22) | increase in imports (F69) |
| lower output from price-constrained firms (D22) | overall output (E23) |