This paper develops a heterogeneous firm model of international trade with trade intermediation and financial frictions. Indirect exporting through intermediaries entails lower fixed costs but larger variable costs, and thus alleviates financial frictions which magnify the fixed cost of exporting. The model finds strong support in firm-level data on indirect exports for 121 countries as well as country-level data on entrepot trade through Hong Kong for over 50 countries. Financially more constrained exporting firms and financially less developed countries are more likely to use trade intermediaries. Both of these effects are stronger in financially more vulnerable industries. Calibrating a two-country version of the model in general equilibrium for China and US reveals important gains from trade intermediation. When indirect exporting is eliminated for China, welfare, exports, and the share of exporting firms fall by 0.24%, 18%, and 59% respectively.
This paper uses the historical episode of the near-elimination of commuting from the West Bank into Israel, which caused a large and rapid expansion of the local labor force in the West Bank, to test the predictions of the Heckscher-Ohlin-Vanek (HOV) model of trade. I use variation between districts in the West Bank to test these predictions, and find strong support for them: Wage changes were not correlated with the size of the shock to the district labor force (Factor Price Insensitivity); Districts that received larger influx of returning commuters shifted production more towards labor intensive industries (Rybczynski effect); And on the consumption side, the data are consistent with the assumption of identical homothetic preferences, which, combined with the production results, supports the Heckscher-Ohlin-Vanek theorem on the factor content of trade.
This paper explores two mechanisms through which a sovereign default can disrupt the domestic economy via its banking system. First, a sovereign default creates a negative balance-sheet effect on banks, which reduces their ability to raise funds and prevents the flow of resources to productive investments. Second, default undermines internal liquidity as banks replace government securities with less productive investments. I quantify the model using Argentinean data and find that these two mechanisms can generate a deep and persistent fall in output post-default, which accounts for the government's commitment necessary to explain observed levels of external public debt. The balance-sheet effect is more important because it generates a larger output cost of default and a stronger ex-ante commitment for the government. Post-default bailouts of the banking system, although desirable ex-post, are welfare reducing ex-ante since they weaken government's commitment. Imposing a minimum public debt requirement on banks is welfare improving as it enhances commitment by increasing the output cost of default.
The rapid development of South Korea is characterized by two features: export-oriented economy and business groups. This paper asks whether forming a business group enhances the export competitiveness of its member firms through a financial channel. More precisely, I claim that forming a business group lowers default risks by diversifying profit sources across various industries and thus allows its member firms to borrow at lower interest rates; in turn, the member firms export more in intensive and extensive margins. I build a model, derive its theoretical implications, and test these implications with Korean firm-level data against alternative explanations. The empirical results suggest that the financial benefit through diversification plays an important role in Korean business groups' superior export performance.
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