A Matching Theory of Global Supply Chains

Abstract:

This paper develops a simple general equilibrium model of global supply chains (GSCs) that jointly addresses three key decisions of firms forming GSCs, namely selection (whether to form a GSC), location (where to find GSC partners), and matching (with which firms to form a GSC). The model develops a Becker type assortative matching model of final producers and suppliers both of which are heterogeneous in capability (productivity/quality) of their tasks, and integrates it with a Melitz type model of selection and a Ricardian comparative advantage model of location. The model presents a new mechanism of gains from trade associated with firm heterogeneity. Namely, trade liberalization causes rematching of firms toward positive assortative matching at the world level as a recent empirical study on exporter-importer matching data observes.