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Markups, Firm Performance and International Trade

Paper Session

Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, M301
Hosted By: American Economic Association
  • Chair: Julia Cajal-Grossi, Graduate Institute IHEID

The Origins of Firm Heterogeneity: A Production Network Approach

Andrew B. Bernard
Dartmouth College
Emmanuel Dhyne
National Bank of Belgium
Glenn Magerman
Free University of Brussels
Kalina Manova
University College London
Andreas Moxnes
University of Oslo


This paper quantifies the origins of firm size heterogeneity when firms are interconnected
in a production network. We document new stylized facts about the universe
of buyer-supplier relationships among all firms in Belgium during 2002-2014. These
facts motivate a model in which firms buy inputs from upstream suppliers and sell to
downstream buyers and final demand. Firms can be large not only because they have
high production capability (i.e. productivity or product quality), but also because they
interact with more, better and larger buyers and suppliers, and because they are better
matched to their buyers and suppliers. The model delivers an exact decomposition of
firm size into upstream and downstream margins with firm, buyer/supplier and match
components. We establish three empirical results. First, downstream factors explain
the vast majority of firm size heterogeneity, while upstream factors are only one fourth
as important. Second, nearly all the variation on the downstream side is driven by network
sales to other firms rather than final demand. By contrast, most of the variation
on the upstream side reflects own production capability rather than network purchases
from input suppliers. Third, most of the variance in network sales is determined by
the number of buyers and the allocation of sales towards well-matched buyers of high
quality, rather than by average buyer capability. By contrast, most of the variance in
network purchases comes from average supplier capability and the allocation of purchases
towards well-matched suppliers of high quality, rather than from the number of

International Buyers' Sourcing and Suppliers' Markups in Bangladesh

Julia Cajal-Grossi
Graduate Institute IHEID
Rocco Macchiavello
London School of Economics
Guillermo Noguera
Yale University


Dealing with international buyers - especially those from developed countries - can
substantially improve performance of exporters from developing countries. This paper
exploits uniquely detailed customs data from the Bangladeshi Ready-Made Garment
sector in which imported input materials can be matched to export orders for specic
buyers. Observing prices and quantities for both import and export transactions we
develop a methodology that recovers order specic marginal costs and mark-ups under
relatively mild assumptions. We document several new facts and contrast them with
assumptions made in commonly used theoretical frameworks. Within exporters, there
is large dispersion in prices, costs and markups across orders and buyer effects account
for a large share of such dispersion. We show that sellers have lower marginal costs and higher mark-ups when selling to their core buyers. This "core relationship" effect is not driven by core product
effects, nor by quality or scale. Core relationships displaying these features are concentrated in relatively few buyers that adopt relational sourcing strategies, offering higher markups or the promise of future trade to guarantee the timely and in-form delivery of their export orders.
Chad Syverson
University of Chicago
Sharat Ganapati
Dartmouth College and Georgetown University
Nina Pavcnik
Dartmouth College
JEL Classifications
  • F1 - Trade
  • L1 - Market Structure, Firm Strategy, and Market Performance