Working Paper: CEPR ID: DP10797
Authors: Keith Head; Thierry Mayer
Abstract: We use disaggregated data on car assembly and trade to estimate a model of multinational production. Our framework delineates four theory-based specifications under which all frictions relevant to multinational production can be structurally estimated. In addition to the trade costs and multinational production frictions emphasized in past work, we incorporate a third friction: regardless of production origin, it is more difficult to make sales in markets that are geographically separated from the brand's headquarters. The estimation transparently recovers internally consistent estimates of each type of friction cost. With structural parameters in hand, we investigate the consequences of three trade integration experiments: TPP, TTIP, and Brexit. We show that each type of friction makes a qualitative and quantitative difference in the reallocation of production caused by economic integration.
Keywords: cars; gravity; multinational production model; regional integration; structural estimation
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade costs (F19) | choice of sourcing locations for production (R32) |
| multinational production frictions (i) (F23) | production decisions (L23) |
| introduction of multinational sales frictions (F12) | reallocations of production (D24) |
| introduction of multinational sales frictions (F12) | consumer surplus (D46) |
| deeper integration agreements (F15) | consumer surplus increases (D11) |