O-Ring Production Networks

Banu Demir (), Ana Cecília Fieler, Yi Xu () and Kelly Yang

No 28433, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study a production network where quality choices are interconnected across firms. High-quality firms are skill intensive and trade more with other high-quality firms. Using data from Turkish firms, we document strong assortative matching of skills in the production network. A firm-specific export demand 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. An economy-wide export demand shock of 5 percent induces exporters and non-exporters to upgrade quality, raising the average wage by 1.2 percent. This effect is about nine times the effect in a special case of the model with no interconnection of quality choices.

JEL-codes: F14 L14 O30 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-net
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Published as Banu Demir & Ana Cecília Fieler & Daniel Yi Xu & Kelly Kaili Yang, 2024. "O-Ring Production Networks," Journal of Political Economy, vol 132(1), pages 200-247.

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