Mitigating Information Frictions in Trade: Evidence from Export Credit Guarantees

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.