Working Paper: CEPR ID: DP8535
Authors: Lorenzo Caliendo; Esteban Rossi-Hansberg
Abstract: A firm's productivity depends on how production is organized given the level of demand for its product. To capture this mechanism, we develop a theory of an economy where firms with heterogeneous demands use labor and knowledge to produce. Entrepreneurs decide the number of layers of management and the knowledge and span of control of each agent. As a result, in the theory, heterogeneity in demand leads to heterogeneity in productivity and other firms' outcomes. We use the theory to analyze the impact of international trade on organization and calibrate the model to the U.S. economy. Our results indicate that, as a result of a bilateral trade liberalization, firms that export will increase the number of layers of management and will decentralize decisions. The new organization of the average exporter results in higher productivity, although the responses of productivity are heterogeneous across these firms. In contrast, non-exporters reduce their number of layers, decentralization, and, on average, their productivity. The marginal exporter increases its productivity by about 1% and its revenue productivity by about 1.8%.
Keywords: communication costs; cost function; hierarchies; knowledge management; trade liberalization; wage distribution
JEL Codes: D21; D24; F12; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bilateral trade liberalization (F10) | increase in management layers and decentralization for exporters (F12) |
| increase in management layers and decentralization for exporters (F12) | higher productivity (O49) |
| Non-exporters reduce management layers (F10) | lower productivity (O49) |