NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Trade and Domestic Production Networks

Felix Tintelnot, Ayumu Ken Kikkawa, Magne Mogstad, Emmanuel Dhyne

NBER Working Paper No. 25120
Issued in October 2018, Revised in January 2019
NBER Program(s):The International Finance and Macroeconomics Program, The Industrial Organization Program, The International Trade and Investment Program, The Productivity, Innovation, and Entrepreneurship Program

We use Belgian data with information on domestic firm-to-firm sales and foreign trade transactions to study how international trade affects firms' unit cost and the consumer's real wage. We show theoretically that the gains from trade depend on domestic firm-to-firm linkages. Furthermore, we develop a tractable model of endogenous network formation, allowing firm-to-firm connections to form or break in response to import price changes. Quantitatively, we find that for small import price changes, alternative models that assume a roundabout production structure, despite falsely implying that all firms are connected within one link, yield similar predictions for the change in the real wage to the model that fits the actual linkages between firms. For large changes in the price of foreign goods, both the existing network structure and the endogeneity of the connections between firms are found to be quantitatively important.

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Document Object Identifier (DOI): 10.3386/w25120

 
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