with Banu Demir, Ana Cecilia Fieler, and Kelly Kaili Yang

We study a production network where quality choices are interconnected across firms. High-quality firm sources high-quality inputs and sells to high-quality firms that value its output. Consistent with the theory, we document a novel assortative matching pattern of skills in the network of Turkish manufacturing firms. A trade shock that increases the relative demand for high-quality output increases the firm’s skill intensity and shifts the firm toward skill-intensive partners. To evaluate the general equilibrium effect of the trade shocks, we develop a quantitative model with heterogeneous firms, endogenous quality choices, and network formation. Estimates using the method of simulated moments indicate strong complementarity of quality in production and a moderate directed search in firm-to-firm matching.

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