We model the world economy as one system of endogenous input-output relationships subject to frictions and study how the world's input-output structure and world's GDP change due to changes in frictions. We derive a sufficient statistic to identify frictions from the observed world input-output matrix, which we fully match for the year 2011. We show how changes in internal frictions impact the whole structure of the world's economy and that they have a much larger effect on world's GDP than external frictions. We also use our approach to study the role of internal frictions during the Great Recession of 2007–2009.
We use a comprehensive dataset of French manufacturing ﬁrms to study their internal organization. We ﬁrst divide the employees of each ﬁrm into ‘layers’ using occupational categories. Layers are hierarchical in that the typical worker in a higher layer earns more, and the typical ﬁrm occupies less of them. In addition, the probability of adding (dropping) a layer is very positively (negatively) correlated with value added. We then explore the changes in the wages and number of employees that accompany expansions in layers, output, or markets (by becoming exporters). The empirical results indicate that reorganization, through changes in layers, is key to understand how ﬁrms expand and contract. For example, we ﬁnd that ﬁrms that expand substantially add layers and pay lower average wages in all pre-existing layers. In contrast, ﬁrms that expand little and do not reorganize pay higher average wages in all pre-existing layers.