Firm Heterogeneity, Financial Imperfection, and International Trade

The paper investigates the role of wealth distributions and financial institutions of an economy on within-industry firm heterogeneity in productivity. If there is no financial imperfection so that entrepreneurs are not constrained in borrowing, all of them make the same, optimal, productivity-enhancing investment. As a result, the industry will be composed of many homogeneous firms. If there exists financial imperfection, on the other hand, borrowing is constrained so the initial wealth of an entrepreneur becomes important. Given that the individuals of the economy are endowed with heterogeneous wealth, entrepreneurs with different wealth levels may choose different investment lev-els, resulting in the firm heterogeneity in productivity. The paper examines the impacts of the goods and capital trade on the market structure of the differentiated good sector. Preliminary and incomplet