Periodic Reporting for period 3 - TRADENET (Firm-to-Firm Trade Networks)
Période du rapport: 2020-04-01 au 2021-08-31
In this project, we want to start from the most disaggregated level, using models and data of firm-to-firm networks, explore the statistical properties of these networks, and study what they imply for various aggregate outcomes.
Beyond being useful to replicate the observed structure of firm-to-firm networks, such models can also help understand why shocks affecting these networks may have an impact that is quite different from what is predicted by models of trade in frictionless markets. For instance, the impact of uncertainty shocks is magnified in firms’ networks. The reason is that investment decisions by one firm in the network have consequences for all firms directly or indirectly connected to the firm. Episodes of high uncertainty are thus especially costly in these networks, a question that we study in Martin, Mejean and Parenti (2019, mimeo), using the Brexit vote as a natural experiment of a raise in uncertainty. Another characteristic of frictional markets is that they give raise to dispersed prices, a phenomenon that we study in Fontaine, Martin and Mejean (CEPR Discussion Paper 13960, 2019). We document the large dispersion of prices set by French firms in EMU markets and show that they reveal a strong degree of price discrimination. French firms operating in frictional trade markets maximize their profit by charging different firms with different prices.
Another consequence of the network structure of international trade is that it helps propagate shocks across countries, thus generating business cycle comovements. We study the micro origin of these business cycle comovements in di Giovanni, Levchenko and Mejean (AER, 2018). The analysis exploits highly disaggregated data that allow identifying firms’ linkages with foreign countries and their role as a propagation channel for various shocks. From a normative point of view, these propagation mechanisms are potentially welfare-enhancing as they help diversify risk across countries. What the microeconomic structure of trade networks reveals is that diversification opportunities are de facto limited because firms concentrate their sales on a small number of partners (Kramarz, Martin and Mejean, Forthcoming in the Journal of International Economics). As a consequence, they are left quite exposed to idiosyncratic demand risks, which in turn generate a substantial amount of volatility.
The second contribution is on the identification of transmission mechanisms for shocks through firm-to-firm trade relationships. In di Giovanni, Levchenko and Mejean (AER 2018) as in Kramarz, Martin and Mejean (JIE forthcoming), we have exploited highly granular data to identify such propagation mechanisms. In both cases, the structure of firms’ networks is taken as given. Further work needs to be produced to understand if and how firms in turn react to the shocks by reshuffling their trade portfolio.