Three Essays in Firms, Trade and Development

I present a collection of three essays exploring how firms in developing countries make supply-chain decisions and how those microeconomic decisions aggregate into macroeconomic outcomes. Chapter 1 In the first chapter, which is co-authored with Vasco Carvalho and Matthew Elliott, we consider how a firm’s position in a supply-chain can confer market power. We develop a tractable theory which introduces the notion of a bottleneck: a firm whose removal from the network leads to a sufficiently large fall in aggregate output such that supply can no longer meet demand. We develop a network algorithm to identify bottlenecks in an economy-wide production-network and apply these tools, at scale, in Uganda. We show that bottleneck firms have significantly larger profits, sales, wage bills, and higher mark-ups. They are also located in industries which have fewer new entrants. Chapter 2 In the second chapter, I consider how firms form new supply-chain matches. I develop a model of firm-to-firm search and matching to show that the impact of falling trade costs on firm sourcing decisions and consumer welfare depends on the relative size of search externalities in domestic and international markets. These externalities can be positive if firms share information about potential matches, or negative if the market is congested. Using unique firm-to-firm transaction-level data from Uganda, I show empirical evidence consistent with positive externalities in international markets and negative externalities in domestic markets. Chapter 3 In the third chapter, I build and estimate a dynamic quantitative version of the model presented in Chapter 2 to match transaction level tax data from Uganda. Structural estimates of the model’s parameters provide evidence that the domestic market is more congested than the foreign market. I then show that a 25% reduction in trade costs will lead to a 5.2% increase in consumer welfare, 15% of which was due to search externalities. I also show that reducing search costs between firms could significantly increase welfare, but is best targeted on reducing international search costs when compared to domestic search costs.The International Growth Centre, the European Research Council under the grant EMBED #75722