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Global Production Networks

Paper Session

Tuesday, Jan. 5, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: American Economic Association
  • Chair: Johannes Boehm, Sciences Po

Contracting Frictions in Global Sourcing: Implications for Welfare

Davin Chor
,
Dartmouth College
Lin Ma
,
National University of Singapore

Abstract

Contracting frictions affect firm sourcing decisions, but how much do such frictions –- that firms encounter in their interactions with suppliers around the world –- ultimately matter for trade patterns and country welfare? We develop a model of firm global sourcing in the presence of contracting frictions, that we embed into a quantitative general-equilibrium trade framework. At the micro level, each firm identifies a set of suppliers for its customized inputs, and these interactions are subject to a bilateral holdup problem, following the Grossman-Hart-Moore property-rights approach to the theory of the firm. For each input, the firm chooses the country to source from, as well as the organizational mode: whether to source from within or outside firm boundaries. These firm-level decisions aggregate into a gravity equation for bilateral trade flows by industry and organizational mode, and hence yield a structural expression for the intrafirm trade share. We moreover derive a closed-form expression for welfare that nests the Arkolakis, Costinot and Rodriguez-Clare (AER 2012) formula, making clear how contracting frictions affect welfare relative to that benchmark. By associating key contracting-related parameters in the model to observables (specifically, input industry characteristics and source country rule of law), we are then able to estimate the model using U.S. data on intrafirm trade shares. We demonstrate through a series of counterfactual exercises how and how much such contracting frictions affect the pattern of trade and country welfare.

Firm Heterogeneity and Imperfect Competition in Global Production Networks

Hanwei Huang
,
City University of Hong Kong
Kalina Manova
,
University College London
Frank Pisch
,
University of St. Gallen

Abstract

We study the role of firm heterogeneity and imperfect competition for global production networks and the gains from trade. We develop a quantifiable trade model with (i) two-sided firm heterogeneity, (ii) matching frictions, and (iii) oligopolistic competition upstream. Combining highly disaggregated data on firms' production and trade transactions for China and France, we present empirical evidence in line with the model that cannot be rationalized without features (i)-(iii). Downstream French buyers import higher volumes and quantities at lower prices when upstream Chinese markets become more competitive. These effects are stronger for larger, more productive buyers and weaker when input suppliers are more heterogeneous. Counterfactual analyses indicate that lower barriers to entry upstream, lower matching costs, and lower trade costs amplify firm productivity, firm size dispersion and aggregate welfare downstream. These effects operate through a combination of improved matching of buyers and suppliers, gains from variety, and lower mark-ups. Global production networks thus generate greater impacts and international spillovers from national industrial policy and trade liberalization.

Growth and the Fragmentation of Production

Johannes Boehm
,
Sciences Po
Ezra Oberfield
,
Princeton University

Abstract

How much do changes in the fragmentation of production contribute to growth? Using detailed plant-level data on the manufacturing sector in India between 1990 and 2014, we study Smithian growth, the link between greater fragmentation of production and productivity. We propose a measure of a plant's vertical span, which corresponds roughly to the number of stages in a supply chain that the plant performs in-house; when plants have smaller vertical spans, production is more fragmented. We find that fragmentation increases with development in both the cross-section and time series. Further, within locations at a point in time, larger plants tend to have smaller vertical spans, and increases in sales tend to be associated with decreases in vertical span. This relationship is stronger when the plant changes its share of relationship-specific intermediate purchases. We provide evidence that increased size causes specialization using changes in demand during the tariff liberalization in the 1990s.

O-Ring Production Networks

Banu Demir
,
Bilkent University
Ana Cecilia Fieler
,
Yale University
Daniel Yi Xu
,
Duke University
Kelly Kaili Yang
,
Duke University

Abstract

We study a production network where quality choices are interconnected acrossfirms. High-quality firms are skill intensive and disproportionately source inputs from and sell output to other high-quality firms. Consistent with the theory, wedocument strong assortative matching of skills in the network of Turkish manufacturing firms. In the data, a firm-specific trade shock from a rich country increases the firm’s skill intensity and shifts the firm toward skill-intensive domestic partners. We develop a quantitative model with heterogeneous firms, endogenous quality choices, and network formation. Parameter estimates indicate strong complementarity of quality in production. The effect of firm-specific trade shocks on the demand for skills is about eight times smaller than the average effect of the same shock applied to all firms simultaneously. Aggregate shocks are magnified in general equilibrium because the larger presence of high-quality firms in the network makes it more profitable for other firms to upgrade quality.
JEL Classifications
  • F1 - Trade