Dynamics in Input Sourcing

Abstract

This explores the dynamics of intermediate input sourcing using the confidential U.S. customs trade data from the U.S. Census. I document three key empirical facts on sourcing dynamics, and explain them using a model on supplier uncertainty and learning. I find first that new suppliers have high entry and exit rates, and second, they are given lower shares on average than incumbent suppliers. Third, over time, suppliers' shares tend to converge to an equal level. To explain these facts, I test the two key empirical implications from the Rauch and Watson model. First, supplier uncertainty leads to small orders to new suppliers, and second higher search cost leads to longer relationships. I find evidence consistent with the model and hypothesis of learning.