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Matching and Agglomeration: Theory and Evidence from Japanese Firm-to-Firm Trade

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  • Yuhei Miyauchi

    (Boston University)

Abstract

Why are economic activities geographically concentrated? I argue that matching frictions and increasing returns to scale in firm-to-firm matching for input trade is an important source of agglomeration. Using a yearly panel of firm-to-firm trade in Japan and unanticipated supplier bankruptcies as a natural experiment, I first document that firms rematch with new suppliers at a faster rate in locations and industries with a higher density of alternative suppliers. At the same time, the new supplier matching rate does not decrease with the geographic density of other buyers, hence the matching rate exhibits increasing returns to scale. Motivated by these findings, I develop a structural general equilibrium model of firm-to-firm trade with matching frictions. I structurally estimate the key parameters of the model to precisely replicate the reduced-form estimates, and I show that this agglomeration mechanism explains about a third of the population-density premium in nominal wages in Japan.

Suggested Citation

  • Yuhei Miyauchi, 2019. "Matching and Agglomeration: Theory and Evidence from Japanese Firm-to-Firm Trade," Boston University - Department of Economics - Working Papers Series WP2020-007, Boston University - Department of Economics.
    • Handle: RePEc:bos:wpaper:wp2020-007
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    File URL: http://www.bu.edu/econ/files/2020/04/matching_and_agglomeration_latest.pdf
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    Cited by:

    1. Demir, Banu & Fieler, Cecilia & Xu, Daniel Yi & Yang, Kelly Kaili, 2021. "O-Ring Production Networks," CEPR Discussion Papers 15741, C.E.P.R. Discussion Papers.
    2. Antrà s, Pol & Chor, Davin, 2021. "Global Value Chains," CEPR Discussion Papers 15908, C.E.P.R. Discussion Papers.

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