Research

Abstract: We study how firms’ productivity growth depends on the productivity of their suppliers and buyers and examine the aggregate implications of this form of learning. Using data on firm-to-firm transactions in Belgium, we document evidence consistent with learning from both suppliers and buyers, particularly from the most productive ones. To study the implications of this form of learning in general equilibrium, we develop a model in which firm productivity growth is shaped by the productivity of an endogenously formed network of suppliers and buyers, where firms bargain over the surpluses from trade and learning. Learning between suppliers and buyers increases bilateral trade volumes: suppliers charge lower markups when they learn more from buyers, and buyers have higher demand when they learn more from suppliers. We estimate a small open economy model with firms learning from both domestic and foreign trading partners. Quantitatively, we find that the value of learning is equivalent to 19 percent of aggregate consumption. Welfare gains from reductions in international trade participation costs are underestimated by over 7 percent without learning. Gains from trade are amplified when foreign partners are more productive through productivity catch-up and network upgrading, but are dampened when less productive foreign firms crowd out domestic learning and weaken incentives to form productive relationships.

Abstract: We develop a model of endogenous production networks with fixed costs in the formation of links between firms. We show that the closed economy equilibrium is unique if the set of feasible networks consists only of networks that are acyclic and the buyer initiates the link formation while having full bargaining power in price negotiations with the supplier. We provide examples of multiple equilibria if the supplier initiates the link formation in both cyclic and acyclic feasible networks or if the buyer initiates the link formation in a cyclic production network. We take the acyclic production network model to Belgian data on firm-to-firm production networks and show that it matches well the salient features of the network. The model generates substantial churn in domestic firm-to-firm linkages in response to trade shocks, while delivering only moderately different welfare changes compared to a model with fixed linkages.

Abstract: We study the labor market outcomes at foreign firms in a host country with deep-seated cultural norms that differ substantially from their home country norms. Using employer-employee matched data of the private sector in Saudi Arabia, we find that foreign firms hire a smaller share of women but offer them disproportionately higher wages than domestic firms, suggesting that wage differentials alone do not fully explain worker share differences. To account for these findings, we develop a model incorporating both productivity and amenities to quantify their roles in determining labor market outcomes. Through the lens of our model, women experience disproportionately lower amenities at foreign firms relative to men, such that women sorting away from foreign firms is primarily driven by amenities rather than productivity. Finally, among foreign firms, workers at foreign firms from culturally similar countries to the host country experience greater amenities but lower wage premiums. Our results demonstrate amenities are quantitatively important in understanding the labor market outcomes of foreign firms in a setting where home and host country cultural norms depart.

Abstract: We characterize the life cycle of firms in the presence of frictional product and labor markets and investigate their implications on industrial and labor market policies. Using an extensive panel of Belgian microdata on firm-to-firm transaction linkages and workforce composition, we first document how firms grow in supply chains by adding suppliers, customers, and own employees. We show that firm growth in the product and labor markets exhibits life cycle dynamics, driven by both intensive-margin and extensive-margin adjustments to the composition of trade linkages and workers. Guided by the empirical patterns, we develop an equilibrium model of firm dynamics with endogenous buyer-supplier linkages and worker-firm matching. The novel feature of our model is that both product and labor markets are frictional, so that the expansions of firms are subject to search and matching frictions in both markets. We estimate the model to match key firm life cycle patterns and network characteristics. In our counterfactual analysis, we analyze the effectiveness of various subsidy schemes targeting product and labor markets at different life stages of firms.

Abstract: Gender and race-based barriers to labor market participation have long been associated with misallocation of talent and capital, with notable impacts on aggregate productivity. We examine the aggregate effects of the 2018 lift of the women’s driving ban in Saudi Arabia. We find that firms and workers react to the announcement of the policy very quickly, and that the announcement is associated with increases in employment and the quality of job matches. There is evidence of significant reallocation of workers across firms in response to the policy, with a surge in the share of firms that hire (any) women and increased movement of male and female employees across firms. We develop a framework that examines how the announcement of the elimination of driving restrictions reduces distortions in the labor market, inducing firms to begin hiring women, raising firm efficiency, and increasing employment and wages for women and men.