Discussion Paper Details

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Title: O-Ring Production Networks

Author(s): Banu Demir, Cecilia Fieler, Yi (Daniel) Xu and Kelly Kaili Yang

Publication Date: January 2021


Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Demir, B, Fieler, C, Xu, Y and Yang, K. 2021. 'O-Ring Production Networks'. London, Centre for Economic Policy Research.