Organizing the Global Value Chain

Authors

  • Pol Antràs,

    1. Dept. of Economics, Harvard University, 1805 Cambridge Street, Littauer Center 207, Cambridge, MA 02138, U.S.A.; pantras@fas.harvard.edu
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  • Davin Chor

    1. Dept. of Economics, National University of Singapore, 1 Arts Link, AS2 #06-02, Singapore 117570, Singapore; davinchor@nus.edu.sg
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    • We thank the editor and three anonymous referees for their helpful comments and suggestions. We are also grateful to Arnaud Costinot, Don Davis, Ron Findlay, Elhanan Helpman, Kala Krishna, Marc Melitz, Esteban Rossi-Hansberg, Daniel Trefler, Jonathan Vogel, and David Weinstein, as well as audiences at Berkeley Haas, Chicago, Columbia, Harvard, Northeastern, Notre Dame, NYU Stern, Princeton, Stanford, UCLA, UNH, Wisconsin, Kiel, Munich, Tübingen, Bonn, City University of Hong Kong, HKUST, Nanyang Technological University, National University of Singapore, Singapore Management University, the Econometric Society World Congress (Shanghai), the Society for the Advancement of Economic Theory Conference (Singapore), the Asia Pacific Trade Seminars (Honolulu), the Australasian Trade Workshop (UNSW), and the NBER Summer Institute. We thank Nathan Nunn for making available his data. Ruiqing Cao, Mira Frick, Gurmeet Singh Ghumann, Frank Schilbach, and Zhicheng Song provided excellent research assistance. Chor acknowledges the hospitality of the International Economics Section at Princeton, as well as research funding provided by a Sing Lun Fellowship at Singapore Management University. All errors are our own.


Abstract

We develop a property-rights model of the firm in which production entails a continuum of uniquely sequenced stages. In each stage, a final-good producer contracts with a distinct supplier for the procurement of a customized stage-specific component. Our model yields a sharp characterization for the optimal allocation of ownership rights along the value chain. We show that the incentive to integrate suppliers varies systematically with the relative position (upstream versus downstream) at which the supplier enters the production line. Furthermore, the nature of the relationship between integration and “downstreamness” depends crucially on the elasticity of demand faced by the final-good producer. Our model readily accommodates various sources of asymmetry across final-good producers and across suppliers within a production line, and we show how it can be taken to the data with international trade statistics. Combining data from the U.S. Census Bureau's Related Party Trade database and estimates of U.S. import demand elasticities from Broda and Weinstein (2006), we find empirical evidence broadly supportive of our key predictions. In the process, we develop two novel measures of the average position of an industry in the value chain, which we construct using U.S. Input–Output Tables.

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