Financing Constraints, Firm Dynamics, and International Trade
52 Pages Posted: 9 Sep 2012 Last revised: 5 May 2013
Date Written: May 3, 2013
This paper studies the impact of financial constraints on exporter dynamics, and the role of financial intermediation in international trade. We propose a multi-country general equilibrium model economy in which entrepreneurs and lenders engage in long-term credit relationships. Financial markets are endogenously incomplete because of private information, and financial constraints arise as a consequence of optimal financial contracts. In equilibrium, competitive financial intermediaries actively channel individuals' short-term deposits to fund a diversified portfolio of long-term risky firms. Young and small firms operate below their efficient level, and their financial constraint is relaxed as the entrepreneur's claim to future cash-flows increases. Consistent with empirical regularities, there is a substantial year-to-year transition in and out of export markets for smaller firms, and new exporters account only for a small share of total exports. Established exporters are less likely to exit export markets, and tend to experience a more stable growth.
Keywords: private information, long-term financial contracts, exporter dynamics, international trade, financial intermediation
JEL Classification: F10, D82, L14
Suggested Citation: Suggested Citation