Wednesday, September 16, 2020 | 9:00am-10:30am | ZOOM

Abstract

We study a production network where quality choices are interconnected across firm boundaries. High-quality firm sources high-quality inputs and sell to high- quality firms that value its output. Consistent with the theory, we document a novel assortative matching pattern of skills in the network of Turkish manufacturing firms. A trade shock that increases the relative demand for high-quality output increases the firm’s skill intensity and shifts the firm toward skill-intensive partners. To evaluate the general equilibrium effect of the trade shocks, we develop and estimate a quantitative model with heterogeneous firms, endogenous quality choices, and network formation. Method of Simulated Moments estimates indicate strong complementarity of quality in production and a moderate directed search in relationship formation.