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Endogenous production networks with fixed costs

Author

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  • Dhyne, Emmanuel
  • Kikkawa, Ayumu Ken
  • Kong, Xianglong
  • Mogstad, Magne
  • Tintelnot, Felix

Abstract

We develop a model of endogenous production networks with fixed costs in the formation of links between firms. We show that the closed economy equilibrium is unique if the set of feasible networks consists only of networks that are acyclic and the buyer initiates the link formation while having full bargaining power in price negotiations with the supplier. We provide examples of multiple equilibria if the supplier initiates the link formation in both cyclic and acyclic feasible networks or if the buyer initiates the link formation in a cyclic production network. We take the acyclic production network model to Belgian data on firm-to-firm production networks and show that it matches well the salient features of the network. The model generates substantial churn in domestic firm-to-firm linkages in response to trade shocks, while delivering only moderately different welfare changes compared to a model with fixed linkages.

Suggested Citation

  • Dhyne, Emmanuel & Kikkawa, Ayumu Ken & Kong, Xianglong & Mogstad, Magne & Tintelnot, Felix, 2023. "Endogenous production networks with fixed costs," Journal of International Economics, Elsevier, vol. 145(C).
    • Handle: RePEc:eee:inecon:v:145:y:2023:i:c:s0022199623001277
    DOI: 10.1016/j.jinteco.2023.103841
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    Cited by:

    1. Matthias Fauth & Benjamin Jung & Wilhelm Kohler, 2023. "German Firms in International Trade: Evidence from Recent Microdata," CESifo Working Paper Series 10523, CESifo.

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    More about this item

    Keywords

    Production networks; Endogenous network formation;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F1 - International Economics - - Trade

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