O-Ring Production Networks

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Using data from Turkish forms, we document a 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 towards skill-intensive domestic partners. We explain these patterns with a quantitative model with heterogeneous firms, quality choices, and endogenous network. In the estimated model, high quality firms are skill intensive and trade more with other high quality firms. 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. We use the model to study export promotion policies and the conditions for their success.



Journal of political economy