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 country norms. Using employer-employee matched data of the private sector in Saudi Arabia, we find that foreign firms hire a smaller share of women but offer them disproportionately higher wages than domestic firms, suggesting that wage differentials alone do not fully explain worker share differences. To account for these findings, we develop a model incorporating both productivity and amenities to quantify their roles in determining labor market outcomes. Through the lens of our model, women experience disproportionately lower amenities at foreign firms relative to men, such that women sorting away from foreign firms is primarily driven by amenities rather than productivity. Finally, among foreign firms, workers at foreign firms from culturally similar countries to the host country experience greater amenities but lower wage premiums. Our results demonstrate amenities are quantitatively important in understanding the labor market outcomes of foreign firms in a setting where home and host country cultural norms depart.