Financial Frictions under Regulation and the Puzzle of Chinese High Export
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| Title | Financial Frictions under Regulation and the Puzzle of Chinese High Export
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| Author | Luo Wei and Lv Yue |
| Organization | Institute of International Economy, Nankai University |
| Email | weiluonk@gmail.com；nklvyue@126.com |
| Key Words | China's financial reform has made several breakthroughs, however, financial friction generated from government regulation is still serious. This paper will attempt to study the export effects of interest segmentation between private and formal financial market caused by financial market entry barriers, and of credit allocation imbalance resulting from excessive concentration of credit supply. Based on the framework of asymmetric information, we construct a model with firm level heterogeneous pro |
| Abstract | China's financial reform has made several breakthroughs, however, financial friction generated from government regulation is still serious. This paper will attempt to study the export effects of interest segmentation between private and formal financial market caused by financial market entry barriers, and of credit allocation imbalance resulting from excessive concentration of credit supply. Based on the framework of asymmetric information, we construct a model with firm level heterogeneous productivity and financing-capacity. In the model, one firm’s export probability positively related with its productivity and financing-capacity, and has a negative relationship with the segmentation of financial markets, which is more pronounced for low financing-capacity firms. However, once the firm decided to export, its export value is only positively related with productivity. The model argue that, credit allocation imbalance spurs considerable low-productivity firms export with credit supports, and cause only a few credit constrained high-productivity firms abandon export, so that it has a positive relationship with total export. The effect can partly explain why financial friction and high export coexistence in China. However, credit allocation imbalance may reduce national welfare. The model also reveals that segmentation of financial market negatively related with total exports, and that heterogeneity of productivity has a positive effect on exports, which is more noticeable in higher segmental financial market. These distinctive predictions are tested and confirmed by city and manufacturing industry two-dimensional data in China. |
| Serial Number | WP631 |
| Time | 2014-08-05 |
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