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The Origins of Firm Heterogeneity: A Production Network Approach

Author

Listed:
  • Kalina Manova

    (University of Oxford)

  • Glenn Magerman

    (Université libre de Bruxelles)

  • Emmanuel Dhyne

    (National Bank of Belgium)

  • Andreas Moxnes
  • Andrew Bernard

    (Dartmouth College)

Abstract

This paper evaluates the firm size distribution and firm growth in the presence of production networks. Firms can be large because they attract (i) more suppliers and customers, (ii) larger or better suppliers and customers and (iii) find better matches along these supplier-buyer relationships. In a simple model of monopolistic competition, firms sell to other firms as well as to final demand. The model presents a decomposition of firm sizes into various structural components along supplier, buyer and match characteristics. Using unique data on supplier-buyer relationships across the universe of firms covering all economic activities in Belgium, we present three key results. First, the production network explains all of the variance of the size distribution relative to sales to final demand. Second, inter-firm demand vastly dominates the traditional productivity channel on the supply side. Third, on both the demand and supply side, the extensive margin dominates the intensive margin. In other words: firms are big because they have many rather than important customers/suppliers.

Suggested Citation

  • Kalina Manova & Glenn Magerman & Emmanuel Dhyne & Andreas Moxnes & Andrew Bernard, 2017. "The Origins of Firm Heterogeneity: A Production Network Approach," 2017 Meeting Papers 487, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:487
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    References listed on IDEAS

    as
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    7. Andrew B. Bernard & Andreas Moxnes, 2018. "Networks and Trade," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 65-85, August.
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    More about this item

    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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