CFDP 2314R

Endogenous Spatial Production Networks: Quantitative Implications for Trade & Productivity


Publication Date: November 2021

Revision Date: June 2022

Pages: 85


I develop a model of endogenous production network formation between spatially distant firms. Unlike other such models, it is tractable even for very large numbers of firms, that is, it delivers closed-form predictions for firm-to-firm trade, it can be estimated via maximum likelihood, and it can be used for firm-level counterfactual analysis. I exploit novel micro-data on Indian firm-to-firm production networks for estimation. The estimated model implies that upon market integration across Indian states, over half of the variation in changes in firms’ sales to other firms can be explained by endogenous changes in network structure.

Keywords: production networks, international trade, economic geography

JEL Classification Codes: F11, F12, D24, C67, C68, L11, O11, O12, R12, R15, D85

JEL Classification Codes: F11F12D24C67C68L11O11O12R12R15D85

See CFDP Version(s): CFDP 2314