Trade and Domestic Production Networks

98 Pages Posted: 22 Feb 2019 Last revised: 24 Feb 2019

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

Statistics Norway; IZA Institute of Labor Economics

Emmanuel Dhyne

National Bank of Belgium

Multiple version iconThere are 2 versions of this paper

Date Written: September 12, 2018

Abstract

We use Belgian data with information on domestic firm-to-firm sales and foreign trade transactions to study how international trade affects firm efficiency and real wages. The data allow us to accurately construct the domestic production network of the Belgian economy, revealing several new empirical facts about firms’ indirect exposure to foreign trade through their domestic suppliers and buyers. We use this data to develop and estimate models of domestic production networks and international trade. We first consider a model of trade with an exogenous network structure, which gives analytical solutions for the effects of a change in the price of foreign goods on firms’ production costs and real wages. To examine how gains-from-trade calculations change if buyer-supplier links are allowed to form or break in response to changes in the price on foreign goods, we next develop a model of trade with endogenous network formation. We take both models to the data and compare the empirical results to those we obtain using existing approaches. This comparison highlights the relevance of data on and modeling of domestic production networks in studies of international trade.

Suggested Citation

Tintelnot, Felix and Kikkawa, Ayumu Ken and Mogstad, Magne and Dhyne, Emmanuel, Trade and Domestic Production Networks (September 12, 2018). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-25. Available at SSRN: https://ssrn.com/abstract=3339620 or http://dx.doi.org/10.2139/ssrn.3339620

Felix Tintelnot

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 (Contact Author)

Statistics Norway ( email )

N-0033 Oslo
Norway

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Emmanuel Dhyne

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

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