This paper studies the interaction of labor-market frictions and endogenous production-network formation in firms' decisions on employment, sourcing and production, within the context of trade policy. I construct a quantitative general-equilibrium model featuring worker-firm and firm-to-firm matching in the production process. I calibrate the model and investigate how trade policy and labor-market efficiency affect production-network density, trade flows, unemployment and wage inequality. The model shows a 1.5% decrease in relative labor-market frictions in one country can lead to a 0.1% decrease in the partner country's relative number of downstream production-network linkages. I explore how heterogeneity in firm-to-firm matching costs determines the effect of a trade shock on wage inequality. I show that a protectionist tariff by one country leads to increases in domestic long-run unemployment and real wages. Examining these channels separately leads to sizable quantitative and qualitative changes in the predicted outcomes of trade policy.
This paper studies the interaction between trade liberalization and firm production networks in shaping spatial differences in environmental quality within countries. We first analyze the effect of inter-firm trade in intermediate goods on the level of total regional emissions and average emission intensities. Second, we study the effect of trade liberalization on the spatial distribution of firms within countries in a setting with firm-to-firm production networks. We find that regions with relative proximity to foreign markets attract more firms as international trade barriers diminish. This leads to higher total emissions in such regions due to agglomeration forces, whereas spatial selection together with production networks leads to a decline in average emission intensities.
This project proposes to answer the following questions. What role do supply chains play in shaping wage inequality? How do these supply chains vary by firm productivity levels, and is there a systematic differential response of these supply chains to an international trade shock? If wages are determined by supply chains, this implies that there will be nominal wage consequences for workers in all sectors of the importing economy. How much do changes, due to trade shocks, in firm-level supply-chains spillover into non-import competing sectors? Within all sectors are there heterogeneous responses to trade shocks that vary by firm size and what are the implications of this heterogeneity?