Vladimir Tyazhelnikov: Production Clusters and Offshoring
Job talk. Vladimir Tyazhelnikov is a PhD candidate at University of California, Davis. He will present "Production Clusters and Offshoring".
Vladimir Tyazhelnikov. Photo: UC Davis
I propose a simple and computationally feasible algorithm to solve a firm’s problem for a large class of sequential production models of offshoring. These models allow for production chain of any length, any number of sourcing countries and arbitrary structure of production and trade costs. I show that in this class of models, allocation decisions are interdependent, which generates a new channel of proximity-concentration trade-off. The presence of trade costs makes firms cluster their production in certain countries, while trade liberalization allows firms to fragment their production more and exploit productivity differences between countries more efficiently. I then present a general equilibrium heterogeneous firms model in which every firm solves the allocation problem described above. In this model the distribution of firms’ productivities is endogenous with respect to trade costs: trade liberalization leads to a distribution that stochastically dominates the old one, thus leading to increase in welfare. I use the model to decompose the welfare gains from trade liberalization by two channels: cheaper intermediate inputs and a more efficient production structure. I apply the model to the data and study the case of China joining the WTO. I use a simulated maximum likelihood technique to calibrate the model and find that more efficient production structure accounts for approximately 25% of gains from trade.