I analyze an economy in which pro...t-maximizing ...rms can undertake both laboror capital-augmenting technological improvements. In the long run, the economy looks like the standard growth model with purely labor-augmenting technical change, and the share of labor in GDP is constant. Along the transition path, however, there is capitalaugmenting technical change and factor shares change. A range of policies may have counterintuitive implications due to their eect on the direction of technical change. For example, taxes on capital income reduce the labor share in the short run, but increase it in the medium/long run. Keywords: Economic Growth, Endogenous Growth, Factor Shares, Technical Change. JEL Classi...cation: O33, O14, O31, E25. I thank Manuel Amador, Abhijit Banarjee, Olivier Blanchard, and Jaume Ventura for useful comments. y Massachusetts Institute of Technology, Department of Economics, E52-371, Cambridge, MA 02319; e-mail: daron@mit.edu 1 I.

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An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: Twww.CESifo-group.org/wp T CESifo Working Paper No. 3559

Abstract: Despite its importance for international trade, our under-standing of the matching process between importing and exporting firms remains limited. To shed light on this question, I use confidential U.S. customs data to match firm-level information of Indian manu-facturing exporters from the CMIE-Prowess database with firm-level information of their U.S. importers from the Census Longitudinal Busi-ness Database. I develop a model of sequential production in which buyers (importers) engage in costly search for suppliers (exporters) to control a production stage and optimally decide the amount of investment in search. The model shows that the marginal benefit of assigning a high-capability supplier to a given stage increases with the downstreamness of the stage of production, and relatively more when the final product is less differentiated. Focusing on firm size as a proxy for firm capability, the matched data highlights three key facts that are consistent with the model predictions and are robust to different em-pirical strategies. First, there is positive assortative matching between U.S. buyers and their Indian suppliers. The elasticity of average buyer size with respect to Indian firm size is around 0.2. Second, the strength of positive matching increases with the proximity to final use of the product traded (downstreamness). The magnitude of the buyer size elasticity is 0.5 when Indian firms supply final products to U.S. firms, and close to zero when they supply intermediate products. Finally, matching is stronger- and more sensitive to downstreamness- when the demand elasticity faced by the U.S. buyer is high.

What is the average number of production stages for the US? Is production more vertically fragmented now than decades ago? Do upstream or downstream stages contribute to a larger share of value-added? To answer these questions, I develop two simple measures of vertical fragmentation of production chains across plants using input-output tables. Against common belief, I find that production has become less vertically fragmented over the past 50 years, whether I include services or focus only on tradable goods. An important part of this overall reduction in production staging reflects a shift of value-added towards industries that are closer to final demand, while upstream industries contribute less to the value of final goods. Looking at changes within industries, the production of more complex goods appears to be relatively less fragmented but these goods exhibit the largest increase in the number of production stages. Also, I show that international trade has provided new opportunities to fragment production and, to a small extent, dampened the overall decline in vertical fragmentation. Finally, I provide an alternative application of this index to the study of comparative advantage along production chains: I find evidence that goods that involve fewer production stages and goods that are closer to final demand are more likely to be imported to the US from rich countries.

The adoption and diffusion of inputs in the production network is at the heart of technological progress. What determines which inputs are initially considered and eventually adopted by innovators? We examine the evolution of input linkages from a network perspective, starting from a stylized model of network formation. Producers direct their search for new inputs along vertical linkages, screening the network neighborhood of existing suppliers to identify potentially useful inputs. A subset of these is then adopted, following a tradeoff between the benefits from input variety and the costs of customizing new inputs. Guided by this framework, we document a novel stylized fact at both the sector and the firm level: producers are more likely to adopt inputs that are already used -directly or indirectly -by their current suppliers. In particular, using disaggregated input-output data, we show that initial network proximity of a sector in 1967 significantly increases the likelihood of adoption throughout the subsequent four decades. A one-standard deviation decrease in network distance is associated with an increase in the adoption probability by one third to one half. Similarly, U.S. firms are significantly more likely to develop new input linkages among their suppliers' network neighborhood. Our results imply that the existing production network plays a crucial role in the diffusion of inputs and the evolution of technology. Abstract The adoption and diffusion of inputs in the production network is at the heart of technological progress. What determines which inputs are initially considered and eventually adopted by innovators? We examine the evolution of input linkages from a network perspective, starting from a stylized model of network formation. Producers direct their search for new inputs along vertical linkages, screening the network neighborhood of existing suppliers to identify potentially useful inputs. A subset of these is then adopted, following a tradeoff between the benefits from input variety and the costs of customizing new inputs. Guided by this framework, we document a novel stylized fact at both the sector and the firm level: producers are more likely to adopt inputs that are already used -directly or indirectly -by their current suppliers. In particular, using disaggregated input-output data, we show that initial network proximity of a sector in 1967 significantly increases the likelihood of adoption throughout the subsequent four decades. A one-standard deviation decrease in network distance is associated with an increase in the adoption probability by one third to one half. Similarly, U.S. firms are significantly more likely to develop new input linkages among their suppliers' network neighborhood. Our results imply that the existing production network plays a crucial role in the diffusion of inputs and the evolution of technology. JEL: O33, C67, D57, L23

International trade has experienced a Ricardian revival. In this article, we offer a user guide to assignment models that have contributed to this revival, which we will refer to as Ricardo-Roy (R-R) models. ∗Authors ’

This paper proposes methods to incorporate firm heterogeneity in the standard IO-table based approach to portray the domestic segment of global value chains in a country. Using Chinese firm census data for both manufacturing and service sectors, along with constrained optimization techniques, we split the conventional IO table into sub-accounts, which are used to estimate direct and indirect domestic value added in exports of different types of firm. We find that in China, both state-owned enterprises (SOEs) and small and medium domestic private enterprises (SMEs) have much higher shares of indirect exports and ratios of value-added exports to gross exports (VAX), compared to foreign-invested and large domestic private firms. Based on IO tables for both 2007 and 2010, we find increasing VAX ratios for all firm types, particularly for SOEs. By extending the method proposed by Antràs et al. (2012), we find that SOEs are consistently more upstream while SMEs are consistently more downstream within industries. These findings suggest that SOEs still play an important role in shaping China’s exports.

part by the governments of Norway, Sweden, and the United Kingdom through the Multidonor Trust Fund for Trade and Development. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Amodern economy is an intricately linked web of specialized production units, each relying on the ow of inputs from their suppliers to produce their own output which, in turn, is routed towards other downstream units. In this essay, I argue that this network perpective on production linkages can o¤er novel insights on the sources of aggregate uctuations. To do this, I show (i) how production networks can be mapped to a standard general equilibrium setup; (ii) how to approach input-output from this networked perspective and (iii) how theory and data on production networks can be usefuly combined to shed light on comovement and aggregate uctuations.