O-Ring Production Networks

Banu Demir, Ana Cecília Fieler, Daniel Yi Xu and Kelly Kaili Yang

Journal of Political Economy, 2024, vol. 132, issue 1, 200 - 247

Abstract: We document strong skill matching in Turkish firms’ production networks. Additionally, in the data, export demand shocks from rich countries increase firms’ skill intensity and their trade with skill-intensive domestic partners. We explain these patterns using a quantitative model with heterogeneous firms, quality choices, and endogenous networks. A counterfactual economy-wide export demand shock of 5% leads both exporters and nonexporters to upgrade quality, raising the average wage by 1.2%. This effect is nine times the effect in a scenario without interconnected quality choices. We use the model to study the conditions for the success of export promotion policies.

Date: 2024
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