We explore firm size heterogeneity in production networks. In comprehensive data for Belgium, firms with more customers have higher total sales but lower sales and lower market shares per customer. Downstream factors, especially the number of customers, explain the vast majority of firm size dispersion. We rationalize these facts with a model of network formation and two-dimensional firm heterogeneity. Higher productivity generates more matches and larger market shares among customers. Higher relationship capability generates more customers and higher sales. Model estimates suggest a strong negative correlation between productivity and relationship capability and potentially large welfare gains from improving relationship capability.

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1 July 2022

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Journal of Political Economy 130(7) , pp.1765-1804, 2022

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DOI: 10.1086/719759

https://www.journals.uchicago.edu/doi/full/10.1086/719759

This Journal article is published under the centre's Trade programme.