APPLIED MICRO: Professor Jing Cai (University of Maryland)

Firm-to-Firm Access in Production Networks

To study firm-to-firm access in production networks, we randomized supplier-client referrals among 700 firms in an industry cluster producing the Chinese brush pen. We have two results. (1) A key barrier to access was that firms undervalued potential partners, leading to a low-access trap. The referrals not only created lasting partnerships, but also improved beliefs about potential partner quality and stimulated partner search, leading firms to form additional partnerships beyond those we referred. These effects arose only when firms were subsidized to conduct an initial transaction, allowing them to learn match quality through direct experience. (2) Improving access expanded—rather than merely reallocated—the production network and economic activity. Treated firms increased their total number of partners, upgraded their products, and improved business performance. Indirect effects on prior partners were positive, indicating that gains were not offset by crowding out. Together, these results suggest that low-access traps can constrain industrial development and that improving access can unlock large gains by expanding networks and creating new economic activity.