Working Paper: NBER ID: w25120
Authors: Felix Tintelnot; Ayumu Ken Kikkawa; Magne Mogstad; Emmanuel Dhyn
Abstract: We use Belgian data with information on domestic firm-to-firm sales and foreign trade transactions to study how international trade affects firms' unit cost and the consumer's real wage. We show theoretically that the gains from trade depend on domestic firm-to-firm linkages. Furthermore, we develop a tractable model of endogenous network formation, allowing firm-to-firm connections to form or break in response to import price changes. Quantitatively, we find that for small import price changes, alternative models that assume a roundabout production structure, despite falsely implying that all firms are connected within one link, yield similar predictions for the change in the real wage to the model that fits the actual linkages between firms. For large changes in the price of foreign goods, both the existing network structure and the endogeneity of the connections between firms are found to be quantitatively important.
Keywords: International Trade; Domestic Production Networks; Real Wages; Firm Costs
JEL Codes: E2; F14; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign price changes (F31) | gains from trade (F11) |
| gains from trade (F11) | domestic firm-to-firm linkages (L14) |
| domestic firm-to-firm linkages (L14) | firms' unit costs (D21) |
| domestic firm-to-firm linkages (L14) | real wages (J31) |
| foreign price changes (F31) | firms' unit costs (D21) |
| foreign price changes (F31) | real wages (J31) |
| import price changes (P22) | real wage changes (J31) |
| import price changes (P22) | firms' unit costs (D21) |