Speaker: Kevin Lim is a researcher at Dartmouth College. More »
Abstract: This paper studies the quantitative implications of frictions in the creation and destruction of firm-to-firm trading relationships for aggregate patterns of output and trade. I develop a structural model of trade between heterogeneous firms in which the network of firm-level input-output linkages is determined both dynamically and endogenously. The model generates rich predictions regarding firm connectivity, matching, and relationship dynamics, while remaining computationally tractable. Using both cross-sectional and panel data on trading relationships between US firms, I estimate the model's parameters and show that the model adeptly fits empirical regularities documented in the paper. I then study the model's predicted responses of trade patterns to counterfactual shocks, with four key results. First, endogenous adjustment of firm-to-firm relationships dynamically amplifies the effects of changes in variable trade costs on trade volumes and welfare by more than three times. Second, reductions in the cost of maintaining relationships have effects on trade and welfare that are over 50% larger than cost-equivalent reductions in variable trade costs. Third, stickiness in firm-level relationships imparts a high degree of inertia to the dynamics of aggregate trade and output, with typical responses to shocks exhibiting half-lives of around two years. Finally, the model suggests that taxing trade flows to subsidize the formation of firm-level trading relationships can be welfare improving.
Last Updated: Sep 09, 2016