Production Network Formation, Trade, and Welfare

Costas Arkolakis, Federico Huneeus and Yuhei Miyauchi

No 30954, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the aggregate implications of endogenous production network formation in a multi-location general equilibrium trade model. Firms form supplier and buyer linkages under matching frictions, generating a gravity structure of production networks. We analytically characterize the welfare gains from trade cost reductions relative to a benchmark model with fixed production networks. We calibrate the model to Chilean firm-to-firm data and show that it matches observed domestic and international network responses to tariff reductions. We find that endogenous networks substantially increase the welfare gains from trade, due to inefficiently low equilibrium networks and amplification effects through relationship-formation costs.

JEL-codes: F10 R13 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-bec, nep-geo, nep-int, nep-net and nep-ure
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Related works:
Working Paper: Production Network Formation, Trade, and Welfare (2025)
Working Paper: Production Network Formation, Trade, and Welfare (2025)
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