Growing Together and Apart: Scale Economies and Specialization

Moynihan Institute, and the program for Trade, Development, and Political Economy is proud to host Mr. Chong Xiang, professor of economics at Purdue University.

This paper analyzes the role of division of labor along the supply chain for generating scale economies and productivity growth. We construct a novel data set of firm-to-firm links which includes information on the occupation structure of buyers and suppliers. Using an instrumental variable approach, we find that firms hit by positive demand shocks raise output and labor productivity, and that their occupation structure diverges relative to their suppliers. We build a parsimonious model of heterogeneous firms and tasks, and estimate the model by simulated method of moments. The estimated model parameters suggest that specialization along the supply chain gives rise to substantial scale economies.