Joint work with Alonso Alfaro-Ureña, Arsenii Scherbov and Jose Vasquez. COMING SOON!!!

Abstract. Using Costa Rican firm-to-firm transaction data, we document heterogeneity in supplier quality, defined as the output elasticity of supplier-specific intermediate inputs. Good suppliers, relative to ordinary suppliers, are more productive, and they are characterized by fewer but more intensive relationships. Input quality differences do not appear to affect buyer performance. To rationalize these findings, we build a general equilibrium model of the production network where firms can endogenously choose different operational regimes: ordinary versus quality input supply. Firms with ex-ante higher productivity are more likely to choose the quality regime: in exchange for relationship-specific monitoring costs, they deliver inputs more efficiently and enjoy higher markups, thus shrinking the cost advantages that are passed down to their buyers. Quality suppliers prefer fewer but deeper relationships with their customers.