Matching and Agglomeration: Theory and Evidence from Japanese Firm-to-Firm Trade

Yuhei Miyauchi ()
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Yuhei Miyauchi: Boston University

No WP2020-007, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: Why are economic activities geographically concentrated? I argue that matching frictions and increasing returns to scale in firm-to-firm matching for input trade is an important source of agglomeration. Using a yearly panel of firm-to-firm trade in Japan and unanticipated supplier bankruptcies as a natural experiment, I first document that firms rematch with new suppliers at a faster rate in locations and industries with a higher density of alternative suppliers. At the same time, the new supplier matching rate does not decrease with the geographic density of other buyers, hence the matching rate exhibits increasing returns to scale. Motivated by these findings, I develop a structural general equilibrium model of firm-to-firm trade with matching frictions. I structurally estimate the key parameters of the model to precisely replicate the reduced-form estimates, and I show that this agglomeration mechanism explains about a third of the population-density premium in nominal wages in Japan.

Pages: 73 pages
Date: 2019-12
New Economics Papers: this item is included in nep-geo and nep-ure
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