Scandinavian Working Papers in Economics

Working Papers,
Örebro University, School of Business

No 2018:12: Mitigating Information Frictions in Trade: Evidence from Export Credit Guarantees

Natasha Agarwal (), Magnus Lodefalk (), Aili Tang (), Sofia Tano () and Zheng Wang ()
Additional contact information
Natasha Agarwal: World Education Foundation
Magnus Lodefalk: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Aili Tang: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Sofia Tano: Örebro University School of Business, Postal: Örebro University, School of Business, SE - 701 82 ÖREBRO, Sweden
Zheng Wang: University of Nottingham, Postal: School of Economics, Sir Clive Granger Building, University of Nottingham, University Park, Nottingham, NG7 2RD

Abstract: Information frictions make foreign trade risky. Therefore, many countries offer export credit guarantees that insure export transactions against buyers’ default. We investigate the causal effects of guarantees on firm performance. To overcome selection bias, we employ a quasi-experimental design and extraordinarily rich Swedish register data on guarantees, firms and trade. We arrive at three major findings. First, guarantees increase firm exports to the foreign market for which they were issued and elsewhere. The effect on exports elsewhere diminishes with the distance from the intended market. Second, guarantees do not generally impact jobs, value added or productivity. Third, guarantees affect firms heterogeneously. Exports increase the most for small and service firms and in the exports to small foreign firms. These firms are expected to be particularly disadvantaged by information frictions in trade. Guarantees also increase value added and jobs but only for inexperienced users and low-scale exports, respectively. Overall, these patterns indicate that guarantees mitigate information frictions in trade. In terms of the detailed mechanisms, the results suggest that guarantees primarily address the default risk in exports and secondarily ease liquidity constraints.

Keywords: Information frictions; Buyers’ default; Liquidity constraints; Export credit guarantees; Trade; Firm performance

JEL-codes: D22; D82; F14; G28; G32; H81; L25

53 pages, First version: December 21, 2018. Revised: November 19, 2020. Earlier revisions: April 26, 2019, November 13, 2019.

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