Job Market Paper

Firm-Product Linkages and the Evolution of Product Scope
New products added by firms often share similarities with their existing products or connect with the firms in “intuitive” ways. We provide formal, empirical definitions of possible fundamentals underlying those connections and test them against one another in different industries to determine which matter more. To do this, we model additions of new products by firms using a dynamic model in which firms must pay a one-time startup cost for adding new products to their production line. We allow this cost to be reduced if the firm already produces similar products, or shares some characteristics with other firms already producing the product. We consider three measurable characteristics along which firms may be considered “close” to a particular product: input similarity, physical distance to existing locations of production, and upstream-downstream connectedness. We estimate the model using moment inequalities to compare the relative importance of the different proximity measures in each sector.

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