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Title: The Impact of Trade on Organization and Productivity

Author(s): Lorenzo Caliendo and Esteban Rossi-Hansberg

Publication Date: August 2011

Keyword(s): Communication Costs, Cost function, Hierarchies, Knowledge, Management, Trade Liberalization and Wage Distribution

Programme Area(s): International Trade and Regional Economics

Abstract: A firm's productivity depends on how production is organized given the level of demand for its product. To capture this mechanism, we develop a theory of an economy where firms with heterogeneous demands use labor and knowledge to produce. Entrepreneurs decide the number of layers of management and the knowledge and span of control of each agent. As a result, in the theory, heterogeneity in demand leads to heterogeneity in productivity and other firms' outcomes. We use the theory to analyze the impact of international trade on organization and calibrate the model to the U.S. economy. Our results indicate that, as a result of a bilateral trade liberalization, firms that export will increase the number of layers of management and will decentralize decisions. The new organization of the average exporter results in higher productivity, although the responses of productivity are heterogeneous across these firms. In contrast, non-exporters reduce their number of layers, decentralization, and, on average, their productivity. The marginal exporter increases its productivity by about 1% and its revenue productivity by about 1.8%.

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Bibliographic Reference

Caliendo, L and Rossi-Hansberg, E. 2011. 'The Impact of Trade on Organization and Productivity'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8535