Joint work with Alonso Alfaro-Ureña. Revision solicited (R&R) at the American Economic Journal: Microeconomics.
Abstract. This paper develops a framework for the empirical analysis of the determinants of input supplier choice on the extensive margin using firm-to-firm transaction data. Building on a theoretical model of production network formation, we characterize the assumptions that enable a transformation of the multinomial logit likelihood function from which the seller fixed effects, which encode the seller marginal costs, vanish. This transformation conditions, for each subnetwork restricted to one supplier industry, on the out-degree of sellers (a sufficient statistic for the seller fixed effect) and the in-degree of buyers (which is pinned down by technology and by “make-or-buy” decisions). This approach delivers a consistent estimator for the effect of dyadic explanatory variables, which in our model are interpreted as matching frictions, on the supplier choice probability. The estimator is easy to implement and in Monte Carlo simulations it outperforms alternatives based on group fixed effects. We showcase this estimator in an empirical application about the effect of the Ruta 27, a major Costa Rican highway, on firm-to-firm connections. Unlike conventional approaches (which are arguably biased), our estimator registers statistically significant effects, and shows that the highway contributed to the spatial reallocation of the Costa Rican production network.