Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/249011 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9466
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Larger Indian firms selling inputs to other firms tend to have more customers, tend to be used more intensively by their customers, and tend to have larger customers. Motivated by these regularities, I propose a novel empirical model of trade featuring endogenous formation of input-output linkages between spatially distant firms. The empirical model consists of (a) a theoretical framework that accommodates first order features of firm-to-firm network data, (b) a maximum likelihood framework for structural estimation that is uninhibited by the scale of data, and (c) a procedure for counterfactual analysis that speaks to the effects of micro- and macroshocks to the spatial network economy. In the model, firms with low production costs end up larger because they find more customers, are used more intensively by their customers and in turn their customers lower production costs and end up larger themselves. The model is estimated using novel micro-data on firm-to-firm sales between Indian firms. The estimated model implies that a 10% decline in inter-state border frictions in India leads to welfare gains ranging between 1% and 8% across districts. Moreover, over half of the variation in changes in firms’ sales to other firms can be explained by endogenous changes in the network structure.
Subjects: 
production networks
international trade
economic geography
JEL: 
F11
F12
D24
C67
C68
L11
O11
O12
R12
R15
D85
Document Type: 
Working Paper
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