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The origins of firm heterogeneity: a production network approach

Author

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  • Bernard, Andrew
  • Dhyne, Emmanuel
  • Manova, Kalina
  • Magerman, Glenn
  • Moxnes, Andreas

Abstract

This paper quantifies the origins of firm size heterogeneity when firms are interconnected in a production network. Using the universe of buyer-supplier relationships in Belgium, the paper develops a set of stylized facts that motivate a model in which firms buy inputs from upstream suppliers and sell to downstream buyers and final demand. Larger firm size can come from high production capability, more or better buyers and suppliers, and/or better matches between buyers and suppliers. Downstream factors explain the vast majority of firm size heterogeneity. Firms with higher production capability have greater market shares among their customers, but also higher input costs and fewer customers. As a result, high production capability firms have lower sales unconditionally and higher sales conditional on their input prices. Counterfactual analysis suggests that the production network accounts for more than half of firm size dispersion. Taken together, our results suggest that multiple firm attributes underpin their success or failure, and that models with only one source of firm heterogeneity fail to capture the majority of firm size dispersion.

Suggested Citation

  • Bernard, Andrew & Dhyne, Emmanuel & Manova, Kalina & Magerman, Glenn & Moxnes, Andreas, 2019. "The origins of firm heterogeneity: a production network approach," LSE Research Online Documents on Economics 102594, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:102594
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    References listed on IDEAS

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    1. Ezra Oberfield, 2014. "Misallocation in the Market for Inputs," 2014 Meeting Papers 1226, Society for Economic Dynamics.
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    More about this item

    Keywords

    production networks; productivity; firm size heterogeneity;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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