Capital market imperfections and trade liberalization in general equilibrium
with Michael Irlacher, Journal of Economic Behavior & Organization 145, 2018: 402-423.

Abstract This paper develops a new international trade model with firm-specific credit frictions and endogenous borrowing costs in general equilibrium. We highlight new implications of globalization when general equilibrium effects on capital markets are present. In particular, we show that globalization increases the share of financially constrained firms and affects producers very differently depending on their exposure to credit frictions. While the positive effect of globalization dominates for unconstrained firms, higher borrowing costs and tougher competition especially hurt credit-rationed producers. We show that these new adjustments increase the heterogeneity among firms and reduce welfare gains from trade. Our theory is consistent with new empirical patterns from World Bank firm-level data. We show that credit frictions are positively related to the degree of product competition and to the variance of sales across firms.

Effective tax rates, endogenous mark-ups and heterogeneous firms
with Michael Irlacher, Economics Letters 173, 2018: 51-54.

Abstract We provide a new explanation why effective tax rates are smaller for larger firms even in the absence of common channels like profit shifting and lobbying. This result emerges in a heterogeneous firms model with endogenous mark-ups. Our framework features imperfect tax pass-through into prices and partial deductibility of production costs.  Corporate taxes reduce mark-ups and hence pre-tax profits, especially for high cost firms. As production costs are only partially deductible, high cost producers are affected most by taxes. We further show that shocks which affect mark-ups through competition, like globalization, reinforce the heterogeneity in effective tax rates across firms.

Working Papers

Credit constraints, endogenous innovations, and price setting in international trade
with Carsten Eckel, CEPR Discussion Papers No. DP11727, December 2016

Abstract This paper analyzes the effects of credit frictions on within-firm adjustments and selection into exporting when both cost-based productivity and product quality matter for the success of a producer. Our model shows that whether FOB prices are positively or negatively correlated with credit frictions and variable trade costs depends on the sectoral R&D intensity. If the latter is high, prices decrease in credit and trade costs, and vice versa. Furthermore, we show that the aggregate effects of financial shocks also depend on the R&D intensity. Stronger credit frictions lead to firm exit, inefficiently high innovation activity among existing suppliers, and welfare losses that are larger in sectors with low R&D intensity. To analyze the effects of credit frictions, we allow for both cost-based and quality-based sorting in a general equilibrium model of international trade. Producers differ in capabilities to conduct process and quality innovations, and external finance is needed for investments.

Quality and gravity in international trade

with Lisandra Flach, CEPR Discussion Papers No. DP12602, January 2018

Abstract This paper introduces quality innovations with endogenous sunk costs in a heterogeneous firm model of international trade and derives implications for the gravity equation. The model predicts that the effect of fixed costs on exports and on the share of exporters is lower in industries with a higher degree of vertical product differentiation. We use both aggregate trade data and Brazilian firm-level data to estimate gravity equations and find strong evidence for a dampening effect of vertical differentiation on the fixed costs elasticity in international trade. Moreover, we estimate the parameters of our model and simulate the effects of lower fixed trade barriers. Accounting for quality lowers the positive gains from trade and leads to more heterogeneous effects across industries compared to a trade model without quality investments. Consistent with our theory, vertical differentiation affects exports via sunk costs and the extensive margin, whereas the effect of variable trade costs does not depend on quality.

Credit frictions, selection into external finance, and gains from trade
Working Paper, LMU Munich, Department of Economics, May 2018 (updated version)

An earlier version of this paper titled "The role of financial intermediation in international trade" was awarded the "Best Paper Prize for Young Economists" at the Warsaw International Economic Meeting 2015.

Abstract This paper analyzes the effects of credit frictions in a trade model where heterogeneous firms select into two types of external finance. Our model captures that small producers face stronger credit frictions, pay higher borrowing rates and rely on bank finance, whereas large firms use cheaper bond finance. We show that endogenous selection into bank finance represents an additional margin of adjustment which reduces the negative effects of credit frictions on product variety, welfare and gains from trade. Simulations of our model for reasonable parameter values show that this channel is quantitatively important.