Production Network Formation, Trade, and Welfare

Costas Arkolakis, Federico Huneeus and Yuhei Miyauchi

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We study the aggregate implications of production network formation in a quantitative multi-location general equilibrium trade model. Firms search for suppliers and buyers across locations subject to matching frictions, generating a gravity struc-ture of production networks. We develop suficient statistics for global and regional welfare and characterize the deviations from the fixed network environment, including the role of ineficiency and amplification effects of search and matching. We calibrate our multi-sector model to Chilean domestic and international firm-to-firm trade data and show that our model can rationalize the observed increase in domestic supplier linkages after Chile’s recent trade agreements. Abstracting from endogenous networks reduces Chile’s aggregate welfare losses by 20 percent when import costs are raised to their pre-agreement levels, consistent with inefficiently low equilibrium levels of search. Fixing the trade elasticity, the welfare gains from trade relative to municipality autarky drop by 40 percent due to amplification effects of search.

Date: 2025-04
New Economics Papers: this item is included in nep-bec, nep-geo, nep-int, nep-net and nep-ure
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Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Production Network Formation, Trade, and Welfare (2025)
Working Paper: Production Network Formation, Trade, and Welfare (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:971

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