A Simple Model of Buyer-Seller Networks in International Trade

Abstract

The recent literature on firm-to-firm trade has documented salient empirical regularities of the buyer-seller network. We propose a simplistic re-interpretation of the classical Krugman (1980) model that accounts for surprisingly many of the empirical regularities. This re-interpretation relies on randomized bundling of Krugman-varieties into heterogeneous firms, economically neutral 'sales units' that import foreign varieties but belong to local firms, and a statistical reporting threshold that applies to firm-to-firm transactions. We argue that our model provides an important benchmark for the assessment of theoretical models that aim to identify the determinants of firm-to-firm networks.

Sparse Production Networks

“…In a recent paper,Herkenhoff et al (2021) explain a similar set of existing stylized facts on exporters and importers in international trade by re-interpreting theKrugman (1980) model with randomly bundled varieties and statistical reporting thresholds for cross-border transactions. Their approach follows much of the literature by starting with a continuum of heterogeneous firms and adding constraints to match the sparse nature of the data Sheveleva (2022).…”