infonet-economy

We explore the impact of international trade in a monopolistically competitive economy that encompasses technology choice and an endogenous distribution of mark-ups due to credit 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 ?rms (an implication we substantiate using ?rm-level data from Latin America). As a result, smaller rms while not driven out of the market ?may be forced to switch to less productive technologies. Our framework matches several salient patterns in the empirical literature on the impact of trade in developing countries.