Please use this identifier to cite or link to this item: http://hdl.handle.net/1783.1/67287

Credit constraints, quality, and export prices: theory and evidence from China

Authors Fan, Haichao
Lai, Edwin L.C. View this author's profile
Li, Yao Amber View this author's profile
Issue Date 2015
Source Journal of Comparative Economics , v .43, (2), May 2015, p. 390-416
Summary This paper presents theory and evidence from highly disaggregated Chinese data that tighter credit constrains force firms to produce lower quality. The paper modifies Melitz's (2003) model of trade with heterogeneous firms by introducing quality choice and credit constraints. The quality sorting model predicts that tighter credit constraints faced by a firm reduce its optimal prices due to its choice of lower-quality products. However, when quality cannot be chosen by a firm in an efficiency sorting model, there is an opposite prediction that prices increase as firms face tighter credit constraints. An empirical analysis using Chinese bank loans data and a merged sample of large trading firms based on Chinese firm-level data from the National Bureau of Statistics of China (NBSC) and Chinese customs data strongly supports quality sorting and confirms the mechanism of quality adjustment: firms optimally choose to produce lower-quality products when facing tighter credit constraints. Moreover, the predictions of the efficiency sorting model are supported by using quality-adjusted prices in regression analysis and by using quality variation across firms within the same product.
Subjects
ISSN 0147-5967
1095-7227
Language English
Format Article
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