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A Coasian Model of International Production Chains

Author

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  • Russell Hillberry

    (The World Bank)

  • Thibault Fally

    (University of California Berkeley)

Abstract

International supply chains require coordination of numerous activities across multiple countries and firms. We develop a theoretical model in which the optimal organization of a supply chain involves a series of linked decisions that equate, at the margin, (domestic or international) transaction costs and the costs of coordinating more tasks within the firm. The parameters that govern the two types of costs explain variation in supply chain length as well as cross-country variation in gross output-to-value added ratios. Comparative advantage within chains depends solely on the coordination cost parameter. Conditional on participation in a chain, countries with lower coordination costs locate downstream. Within a chain, domestic transaction costs only affect countries' absolute advantage, but a country with large transaction costs tends to specialize in those chains for which its coordination costs are especially low. We provide an analytical treatment of trade and welfare responses to trade cost change in a simple two-country model. To explore the model's implications in a richer setting we calibrate the model to match key observables in East Asia, and evaluate implications of changes in model parameters for trade, welfare, the length of supply chains and countries' relative position within them.

Suggested Citation

  • Russell Hillberry & Thibault Fally, 2015. "A Coasian Model of International Production Chains," 2015 Meeting Papers 282, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:282
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    Cited by:

    1. Johannes Boehm, 2014. "The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity," 2014 Meeting Papers 340, Society for Economic Dynamics.
    2. Johannes Boehm, 2014. "The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity," 2014 Meeting Papers 340, Society for Economic Dynamics.
    3. Njike, Arnold, 2020. "Trade in value-added and the welfare gains of international fragmentation," MPRA Paper 100427, University Library of Munich, Germany.
    4. Peter B. Dixon & Maureen Rimmer, 2019. "Integrating a Global Supply Chain Model With a Computable General Equilibrium Model," Centre of Policy Studies/IMPACT Centre Working Papers g-292, Victoria University, Centre of Policy Studies/IMPACT Centre.
    5. Thibault Fally & James Sayre, 2018. "Commodity Trade Matters," 2018 Meeting Papers 172, Society for Economic Dynamics.
    6. Arnold Njike, 2019. "Trade in value-added and the welfare gains of global value," Working Papers 2019.06, International Network for Economic Research - INFER.
    7. E. Dhyne & C. Duprez, 2017. "The world is a village… The integration of Belgian firms into the world economy," Economic Review, National Bank of Belgium, issue ii, pages 25-36, september.
    8. Bosker, Maarten & Westbrock, Bastian, 2018. "The network origins of the gains from trade," CEPR Discussion Papers 13285, C.E.P.R. Discussion Papers.
    9. Johannes Boehm, 2014. "The Impact of Contract Enforcement Costs on Outsourcing and Aggregate Productivity," 2014 Meeting Papers 340, Society for Economic Dynamics.
    10. Kikuchi, Tomoo & Nishimura, Kazuo & Stachurski, John, 2018. "Span of control, transaction costs and the structure of production chains," Theoretical Economics, Econometric Society, vol. 13(2), May.
    11. Emmanuel Dhyne & Cedric Duprez, 2017. "It’s a Small, Small World... A Guided Tour of the Belgian Production Network," International Productivity Monitor, Centre for the Study of Living Standards, vol. 32, pages 84-96, Spring.
    12. Kenji Suganuma, 2016. "Upstreamness in the Global Value Chain: Manufacturing and Services," IMES Discussion Paper Series 16-E-02, Institute for Monetary and Economic Studies, Bank of Japan.
    13. Udo Kreickemeier & Zhan Qu, 2020. "International trade with sequential production," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(4), pages 1101-1125, June.
    14. Hiroyasu Inoue & Yohsuke Murase & Yasuyuki Todo, 2020. "Do economic effects of the anti-COVID-19 lockdowns in different regions interact through supply chains?," Papers 2009.06894, arXiv.org, revised Jan 2021.
    15. Tomoo Kikuchi & Kazuo Nishimura & John Stachurski & Junnan Zhang, 2019. "Coase Meets Bellman: Dynamic Programming for Production Networks," Papers 1908.10557, arXiv.org, revised Dec 2020.

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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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