Endogenous Production Networks and Gains from Trade

I develop a quantitative trade model with endogenous production networks, namely the collection of supplier-customer relationships among rms. In the model, rms form linkages with each other both within and across borders, balancing the tradeo between extra revenue brought in by downstream connections and xed costs required to establish these relationships. The structure of equilibrium production networks depends both on variable trade costs and linkage xed costs. In particular, trade integration can lead to structural transformations of global production networks, which in turn bring about technological changes on both the rm and the aggregate level. The joint adjustments of domestic and international linkages constitute a new margin along which trade liberalization can a ect welfare. I calibrate the model to trade data between the United States and the rest of the world (ROW) over 2000-2014. The model is able to replicate the actual time trend of the value added share in gross trade, as well as several cross-sectional patterns observed in the US-ROW input-output networks. Applying the model, I quantify the welfare gains of moving from autarky to the 2014 equilibrium to be 15.5%, with a quarter of these gains arising solely from the rearrangement of linkages among rms. ∗Department of Economics, Universitat Pompeu Fabra. Email: [email protected]. I am grateful to my advisor Jaume Ventura for his guidence and encouragement. I also thank Alessandra Bon glioli, Fernando Broner, Julian di Giovanni, Jordi Galí, Gino Gancia, Manuel García-Santana, Alberto Martin, Dávid Nagy, Giacomo Ponzetto, Edouard Schaal, and seminar participants at Universitat Pompeu Fabra for valuable feedback and suggestions.