DP13538 | Harmful Pro-Competitive Effects of Trade in Presence of Credit Market Frictions

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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.