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Organizing the Global Value Chain

  • Pol Antras
  • Davin Chor

    ()

    (School of Economics, Singapore Management University)

We develop a property-rights model of the firm in which production entails a continuum of uniquely sequenced stages. In each stage, a final-good producer contracts with a distinct supplier for the procurement of a customized stage-specific component. Our model yields a sharp characterization for the optimal allocation of ownership rights along the value chain. We show that the incentive to integrate suppliers varies systematically with the relative position (upstream versus downstream) at which the supplier enters the production line. Furthermore, the nature of the relationship between integration and “downstreamness” depends crucially on the elasticity of demand faced by the final-good producer. Our model readily accommodates various sources of asymmetry across final-good producers and across suppliers within a production line, and we show how it can be taken to the data with international trade statistics. Combining data from the U.S. Census Bureau’s Related Party Trade database and estimates of U.S. import demand elasticities from Broda and Weinstein (2006), we find empirical evidence broadly supportive of our key predictions. In the process, we develop two novel measures of the average position of an industry in the value chain, which we construct using U.S. Input-Output Tables.

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Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 25-2012.

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Length: 61 pages
Date of creation: May 2012
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:25-2012
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  1. Su Wang & Jonathan Vogel & Arnaud Costinot, 2011. "An Elementary Theory of Global Supply Chains," 2011 Meeting Papers 95, Society for Economic Dynamics.
  2. Kei-Mu Yi, 2000. "Can vertical specialization explain the growth of world trade?," Staff Reports 96, Federal Reserve Bank of New York.
  3. Grossman, G.M. & Helpman, E., 2002. "Outsourcing in a Global Economy," Papers 218, Princeton, Woodrow Wilson School - Public and International Affairs.
  4. Baldwin, Richard & Venables, Anthony J., 2013. "Spiders and snakes: Offshoring and agglomeration in the global economy," Journal of International Economics, Elsevier, vol. 90(2), pages 245-254.
  5. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2007. "Estimating Trade Flows: Trading Partners and Trading Volumes," NBER Working Papers 12927, National Bureau of Economic Research, Inc.
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  7. Philipp Harms & Oliver Lorz & Dieter Urban, 2009. "Offshoring Along the Production Chain," Working Papers 09.01, Swiss National Bank, Study Center Gerzensee.
  8. David Weinstein & Christian Broda, 2004. "Globalization and the Gains from Variety," 2004 Meeting Papers 530, Society for Economic Dynamics.
  9. Antràs, Pol, 2011. "Grossman-Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production," CEPR Discussion Papers 8598, C.E.P.R. Discussion Papers.
  10. Nathan Nunn, 2005. "Relationship Specificity, Incomplete Contracts and the Pattern of Trade," International Trade 0512018, EconWPA.
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  14. Antràs, Pol & Chor, Davin & Fally, Thibault & Hillberry, Russell, 2012. "Measuring the Upstreamness of Production and Trade Flows," CEPR Discussion Papers 8839, C.E.P.R. Discussion Papers.
  15. repec:rje:randje:v:37:y:2006:2:p:376-390 is not listed on IDEAS
  16. Robert C. Feenstra & John Romalis & Peter K. Schott, 2002. "U.S. Imports, Exports, and Tariff Data, 1989-2001," NBER Working Papers 9387, National Bureau of Economic Research, Inc.
  17. Findlay, Ronald, 1978. "An "Austrian" Model of International Trade and Interest Rate Equalization," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 989-1007, December.
  18. Wilhelm Kohler, 2004. "International outsourcing and factor prices with multistage production," Economic Journal, Royal Economic Society, vol. 114(494), pages C166-C185, 03.
  19. Sanyal, Kalyan K, 1983. "Vertical Specialization in a Ricardian Model with a Continuum of Stages of Production," Economica, London School of Economics and Political Science, vol. 50(197), pages 71-78, February.
  20. Kremer, Michael, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 551-75, August.
  21. Eyal Winter, 2006. "Optimal incentives for sequential production processes," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 376-390, 06.
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