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Production Network Formation, Trade, and Welfare

Author

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  • Costas Arkolakis
  • Federico Huneeus
  • Yuhei Miyauchi

Abstract

We study the aggregate implications of production network formation in a quantitative multi-location general equilibrium trade model. Firms search for suppliers and buyers across locations subject to matching frictions, generating a gravity structure of production networks. We develop sufficient statistics for global and regional welfare and characterize the deviations from the fixed network environment, including the role of inefficiency and amplification effects of search and matching. We calibrate our multi-sector model to Chilean domestic and international firm-to-firm trade data and show that our model can rationalize the observed increase in domestic supplier linkages after Chile’s recent trade agreements. Abstracting from endogenous networks reduces Chile’s aggregate welfare losses by 20 percent when import costs are raised to their pre-agreement levels, consistent with inefficiently low equilibrium levels of search. Fixing the trade elasticity, the welfare gains from trade relative to municipality autarky drop by 40 percent due to amplification effects of search.

Suggested Citation

  • Costas Arkolakis & Federico Huneeus & Yuhei Miyauchi, 2023. "Production Network Formation, Trade, and Welfare," NBER Working Papers 30954, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30954
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    References listed on IDEAS

    as
    1. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    2. Gene M. Grossman & Elhanan Helpman & Hugo Lhuillier, 2023. "Supply Chain Resilience: Should Policy Promote International Diversification or Reshoring?," Journal of Political Economy, University of Chicago Press, vol. 131(12), pages 3462-3496.
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    Cited by:

    1. Chacha, Peter Wankuru & Kirui, Benard Kipyegon & Wiedemann, Verena, 2024. "Supply Chains in Times of Crisis: Evidence from Kenya’s Production Network," World Development, Elsevier, vol. 173(C).
    2. Xu, Le & Yu, Yang & Zanetti, Francesco, 2025. "The adoption and termination of suppliers over the business cycle," Journal of Monetary Economics, Elsevier, vol. 151(C).
    3. Verena Christina Wiedemann & Kirui,Benard K. & Khandelwal,Vatsal & Chacha,Peter W., 2024. "Spatial Inequality and Informality in Kenya’s Firm Network," Policy Research Working Paper Series 10932, The World Bank.
    4. Lafond, François & Astudillo-Estévez, Pablo & Bacilieri, Andrea & Borsos, András, 2023. "Firm-level production networks: what do we (really) know?," INET Oxford Working Papers 2023-08, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    5. Liu, Rui & Zheng, Linhao & Chen, Zheang & Cheng, Mengyao & Ren, Yuzhuo, 2024. "Digitalization through supply chains: Evidence from the customer concentration of Chinese listed companies," Economic Modelling, Elsevier, vol. 134(C).
    6. 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).
    7. Fujiy,Brian C. & Ghose,Devaki & Khanna,Gaurav, 2024. "Production Networks and Firm-level Elasticities of Substitution," Policy Research Working Paper Series 10782, The World Bank.

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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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