Matching to Suppliers in the Production Network: a Quantitative Framework

Joint work with Alonso Alfaro-Ureña. Accepted at the American Economic Journal: Microeconomics, conditional on compliance with the data policy.

Abstract. We build a model of production network formation that enables econometric estimation of the determinants of supplier choice, like trade costs or matching frictions. The model informs an estimator obtained from a transformation of the multinomial logit likelihood function that conditions on two network statistics: the out-degree of sellers (a sufficient statistic for the seller marginal costs) and the in-degree of buyers (which is determined by decisions of buyers, like “make-or-buy”). In an empirical application, this estimator shows that a prominent Costa Rican highway fostered firm-to-firm connections between core and peripheral regions, and within the core regions themselves.