Research

We develop a model of endogenous production networks with fixed costs in the formation of links between firms. We show that the closed economy equilibrium is unique if the set of feasible networks consists only of networks that are acyclic and the buyer initiates the link formation while having full bargaining power in price negotiations with the supplier. We provide examples of multiple equilibria if the supplier initiates the link formation in both cyclic and acyclic feasible networks or if the buyer initiates the link formation in a cyclic production network. We take the acyclic production network model to Belgian data on firm-to-firm production networks and show that it matches well the salient features of the network. The model generates substantial churn in domestic firm-to-firm linkages in response to trade shocks, while delivering only moderately different welfare changes compared to a model with fixed linkages.

We study the labor market outcomes at foreign firms in a host country with deep-seated cultural norms that differ substantially from their home countries’ norms. We analyze unique employer-employee matched data of the private sector in Saudi Arabia and find that, relative to domestic firms, foreign firms pay higher wages but hire a smaller share of Saudi and female workers. Moreover, the differences in worker shares cannot be fully rationalized by wage differentials. To better understand these findings, we develop a tractable model to quantitatively assess the role of productivity and amenities in determining wage and employment outcomes. We estimate a foreign wage premium ranging from 13% to 21% depending on worker demographics. In addition, we find that workers enjoy better amenities at foreign firms overall, with the exception of female workers. Workers at foreign firms coming from countries that are culturally close to the host country face lower wage premiums but higher amenities. Worker sorting patterns are primarily driven by differences in amenities rather than productivity. Our results demonstrate amenities are quantitatively important in understanding the labor market outcomes of foreign firms in a setting in which home and host country cultural norms depart.