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Forward-looking investments determine the resilience of firms' supply chains. Such investments confer externalities on other firms in the production network. We compare the equilibrium and optimal allocations in a general equilibrium model with an arbitrary number of vertical production tiers. Our model features endogenous investments in protective capabilities, endogenous formation of supply links, and sequential bargaining over quantities and payments between firms in successive tiers. We derive policies that implement the first-best allocation, allowing for subsidies to input purchases, network formation, and investments in protective capabilities. The first-best policies depend only on production function parameters of the pertinent tier. When subsidies to transactions are infeasible, the second-best subsidies for resilience depend on production function parameters throughout the network, and subsidies are larger upstream than downstream whenever the bargaining weights of buyers are nonincreasing along the chain. [ABSTRACT FROM AUTHOR]

While neoclassical theory emphasizes the impact of trade on wage inequality between occupations and industries, more recent theories of firm heterogeneity point to the impact of trade on wage dispersion within occupations and industries. Using linked employer-employee data for Brazil, we show that much of the increase in wage inequality between 1986 and 1998 has occurred within sector-occupations; the increase in the within component of wage inequality is driven by wage dispersion across firms; and the change in wage dispersion between firms is related to trade participation. We then use an extension of the theoretical model from Helpman, Itskhoki, and Redding (2010a) to construct an econometric model of the effect of trade on inequality, which we estimate with Brazilian data. We show that the estimated model fits the data well, both in terms of some key moments as well as in terms of the overall distributions of wages and employment. International trade is important for this fit. In particular, we show that by shutting down the trade channel the estimated model is significantly less successful in matching the data. Finally, we quantify the contribution of the firm-based channel through which trade affects wage inequality.

Multinational enterprises are very large multi-product firms. To capture salient features of the data, we develop a model of large multinational enterprises, each one producing a continuum of products. These outsized firms compete as oligopolists in domestic and foreign markets, facing competitive pressure from monopolistically competitive single-product firms. The multinational enterprises engage in foreign direct investment (FDI) in order to expand the product scope of their foreign affiliates, and they invest in research and development (R&D) in order to invent new products. We study the dynamic evolution of these enterprises and characterize transition dynamics and steady states. We also characterize the evolution of prices, markups, market shares, and exports relative to subsidiary sales. Furthermore, we study comparative dynamics that result from changes in trade costs, R&D costs, FDI costs, and productivity. Finally, we illustrate the use of our model for an analysis of mergers. [ABSTRACT FROM AUTHOR]