Global Value Chains in General Equilibrium

Abstract

Two additional aspects are considered beyond the standard general equilibrium setting with production under uncertainty. Firstly, sequential production forces firms to forecast future demand, produce in advance, and store inventory. Secondly, firms face a location decision, locating near customers based on logistics costs. In equilibrium a gravity-type relationship tends to hold, and markets operate efficiently aside from a coordination externality. We then study the interaction between value chains and decreasing returns technologies, as well as a tendency for downstream firms to decentralize.