Theory and Evidence of Firm-to-firm Transaction Network Dynamics

How are supply chains formed and restructured over time? This paper investigates firm-to-firm transaction network dynamics from theoretical and empirical perspectives, exploiting large-scale firm-level transaction data from Japan. First, we provide basic facts which show substantial churning in supply chains over time, even after excluding the cases where either supplier or customer firms exit from the market. Second, we empirically find that productivity positive assortative matching between firms exists. Firms are more likely to keep trading with more productive firms and instead stop trading with less productive ones. Alternatively, more productive firms start new transactions with more productive business partners. Lastly, we build a theoretical framework to rationalize these findings. Both supplier and customer firms are heterogeneous and choose their trading partners with many-to-many matching setting. We derive the implications for supply chain formation and restructuring in response to productivity shocks.