My paper "Credit constraints, endogenous innovations, and price setting in international Trade" has been accepted for publication in the International Economic Review.
This paper is joint work with Carsten Eckel from LMU Munich. We analyze the effects of credit frictions on prices, productivity and welfare in a trade model with two types of firm heterogeneity. Producers differ in their capabilities to conduct process and quality innovations, and require external finance to invest in innovations. Stronger credit frictions lead to firm exit, higher innovation activity of surviving producers, and ambiguous effects on prices, depending on a key variable, the degree of quality differentiation in a sector. Accounting for cost-based and quality-based sorting of firms in a unified framework allows us to show that the reactions of prices and of commonly used productivity measures do not necessarily reflect welfare implications. Credit frictions lead to distortions through aggravated access to finance and endogenous price adjustments, such that the responses of quantity-based and revenue-based productivity differ substantially. In a counterfactual analysis, we show that these differential effects are quantitatively important.
You can find the online version of the paper here.