quality innovations at low costs, whereas investment outlays have to be financed by external capital. We show that the scope … types of innovation resulting in opposing effects on marginal production costs and prices. In general equilibrium, financial … frictions intensify quality-based (cost-based) sorting of firms if the scope for vertical product differentiation is high (low …

a trade model with heterogeneous exporters and endogenous quality choice. The model predicts that financial development … increases innovation activity and export shares of larger firms. In contrast, a model variant in which exporters have to finance … firms, especially in sectors with high external finance dependence and large scope for quality differentiation. This effect …

This paper introduces quality innovations with endogenous sunk costs in a heterogeneous firm model of international … model and simulate the effects of a reduction in 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 …

a substantial impact on heterogeneous firms' exit, export, and process innovation decisions, the impact of changes in … these decisions on welfare is largely offset by the response of product innovation. Our results suggest that microeconomic …