Production Network Formation, Trade, and Welfare
We study the aggregate implications of endogenous production network formation in a multi-location general equilibrium trade model. Firms form supplier and buyer linkages under matching frictions, generating a gravity structure of production networks. We analytically characterize the welfare gains from trade cost reductions relative to a benchmark model with fixed production networks. We calibrate the model to Chilean firm-to-firm data and show that it matches observed domestic and international network responses to tariff reductions. We find that endogenous networks substantially increase the welfare gains from trade, due to inefficiently low equilibrium networks and amplification effects through relationship-formation costs.
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Copy CitationCostas Arkolakis, Federico Huneeus, and Yuhei Miyauchi, "Production Network Formation, Trade, and Welfare," NBER Working Paper 30954 (2023), https://doi.org/10.3386/w30954.Download Citation
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