The Geographic and Sectoral Impact of Productivity

To understand the geographic and sectoral impact of productivity, we build the first input-output matrix disaggregated at the geographic level within a country using unique administrative data harmonized to match national accounts. We use this data from Chile to calibrate a state-of-the-art general equilibrium quantitative trade model with production networks, labor mobility, firm selection, international and domestic trade, congestion of fixed factors, and knowledge diffusion. We consider two applications. First, we study the aggregate effects of local productivity shocks. We show that location-sector interactions are crucial: locations and sectors separately account for less than half of the dispersion in GDP elasticities from location-sector- specific productivity shocks. Geography-specific input-output linkages explain 16% of the dispersion, due to the role played by small and influential markets. Second, we analyze the exit of a large steel plant. We show that geographically disaggregated production linkages substantially increase the propagation of the plant exit.