Trade and Domestic Production Networks

62 Pages Posted: 8 Oct 2018 Last revised: 14 Dec 2022

See all articles by Felix Tintelnot

Felix Tintelnot

University of Chicago Department of Economics

Ayumu Ken Kikkawa

University of British Columbia (UBC) - Sauder School of Business

Magne Mogstad

University of Chicago

Emmanuel Dhyne

National Bank of Belgium

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Date Written: October 2018

Abstract

We use Belgian data with information on domestic firm-to-firm sales and foreign trade transactions to study how international trade affects firms' unit cost and the consumer's real wage. We show theoretically that the gains from trade depend on domestic firm-to-firm linkages. Furthermore, we develop a tractable model of endogenous network formation, allowing firm-to-firm connections to form or break in response to import price changes. Quantitatively, we find that for small import price changes, alternative models that assume a roundabout production structure, despite falsely implying that all firms are connected within one link, yield similar predictions for the change in the real wage to the model that fits the actual linkages between firms. For large changes in the price of foreign goods, both the existing network structure and the endogeneity of the connections between firms are found to be quantitatively important.

Suggested Citation

Tintelnot, Felix and Kikkawa, Ayumu Ken and Mogstad, Magne and Dhyne, Emmanuel, Trade and Domestic Production Networks (October 2018). NBER Working Paper No. w25120, Available at SSRN: https://ssrn.com/abstract=3262355

Felix Tintelnot (Contact Author)

University of Chicago Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Ayumu Ken Kikkawa

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Magne Mogstad

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Emmanuel Dhyne

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

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