Endogenous Production Networks and Gains from Trade

Yimei Zou
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Yimei Zou: Institute for International Economics Studies, Stockholm University

No 594, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: I develop a quantitative trade model with endogenous production networks, namely the collection of supplier-customer relationships among firms. In the model, firms form linkages with each other both within and across borders, balancing the tradeoff between extra revenue brought in by downstream connections and fixed costs required to establish these relationships. The structure of equilibrium production networks depends both on variable trade costs and linkage fixed costs. In particular, trade integration can lead to structural transformations of global production networks, which in turn bring about technological changes on both the firm and the aggregate level. The joint adjustments of both domestic and international linkages constitute an additional margin along which trade liberalization can affect welfare. I calibrate the model to trade data between the United States and the rest of the world (ROW) over 2000-2014. The model is able to replicate the actual time trend of the value added share in gross trade, as well as several cross-sectional patterns observed in the US-ROW input-output networks. Applying the model, I quantify the welfare losses of moving from the 2014 equilibrium to autarky to be 4.11%, with more than a third of these losses arising solely from the rearrangement of linkages among firms.

Date: 2019
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