Working Paper: NBER ID: w11752
Authors: Yongmin Chen; Robert C. Feenstra
Abstract: This paper studies a simple model of buyer investment and its effect on the variety and vertical structure of international trade. A distinction is made between two types of buyer investment: "flexible" and "specific." Their interactions with the entry and pricing incentives of suppliers are analyzed. It is shown that (i) there can be multiple equilibria in the variety of products traded, and (ii) less product variety is associated with more intrafirm trade. The possibility of multiple equilibria is consistent with the observation that some similar economies, such as Taiwan and South Korea, differ substantially in their export varieties to the U.S. A formal empirical analysis confirms the negative correlation between product variety and intrafirm trade.
Keywords: buyer investment; product variety; intrafirm trade
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital intensity and labor endowments (J24) | product variety (L15) |
| specific investments by buyers (G31) | less product variety (L15) |
| less product variety (L15) | more intrafirm trade (F12) |
| more intrafirm trade (F12) | fewer varieties (L15) |
| product variety (L15) | intrafirm trade (F12) |