An 'Austrian' Model of Global Value Chains

This paper develops a stylized model of multi-stage production in which the duration of each production stage is endogenously determined. Drawing on ideas from the Austrian economics tradition, the authors show that longer production processes raise labor productivity but also increase firms’ working capital needs. In autarky, countries with lower interest rates exhibit longer production chains, higher productivity, and higher wages. Under free trade, countries with lower interest rates specialize in relatively time-intensive stages of global value chains. The model also demonstrates how trade integration, interest rate equalization, trade finance, and declining trade costs shape vertical specialization and the expansion of global value chain trade.