Working Paper: NBER ID: w28433
Authors: Banu Demir; Ana Cecilia Fieler; Daniel Xu; Kelly Kaili Yang
Abstract: We study a production network where quality choices are interconnected across firms. High-quality firms are skill intensive and trade more with other high-quality firms. Using data from Turkish firms, we document strong assortative matching of skills in the production network. A firm-specific export demand shock from a rich country increases the firm's skill intensity and shifts the firm toward skill-intensive domestic partners. We develop a quantitative model with heterogeneous firms, endogenous quality choices, and network formation. An economy-wide export demand shock of 5 percent induces exporters and non-exporters to upgrade quality, raising the average wage by 1.2 percent. This effect is about nine times the effect in a special case of the model with no interconnection of quality choices.
Keywords: production networks; export demand shocks; skill intensity; quality choices
JEL Codes: F14; L14; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm-specific export demand shock from a high-income country (F29) | increases the firm's skill intensity (J24) |
| firm-specific export demand shock from a high-income country (F29) | shifts the firm's trading relationships toward other high-quality, skill-intensive firms (F12) |
| firm-specific export demand shock from a high-income country (F29) | increases the firm's wages (J39) |
| economy-wide export demand shock of 5% (F41) | raises the average wage by 12% (J31) |
| non-exporting firms upgrade quality (L15) | average wage increase of 10% (J31) |
| interconnected nature of firms' quality choices (L15) | magnifies the impact of shocks (E71) |