Abstract

Since the increase of product fragmentation in the last decade of the twentieth century, supply chains have promoted important debates concerning income inequality. Standard economic models explain facets of this phenomenon through a series of market failures and using simple production structures. In contrast to that, this paper presents a theoretical model in which countries trade along supply chains under a perfect competition framework. In such a way, it complements the economic literature with a characterization of the effects that the network structure of the supply chain has over the income differences among countries without mixing it with the effect that market failures and externalities have over this phenomenon. This paper contributes to the economic literature in two different ways. From one side, it provides an alternative theoretical explanation to several empirical regularities that have been documented in the literature. From another side, it extends some of the results presented in the trade and fragmentation literature to a wider range of production structures and explains which structures are based on particular assumptions and which are valid in more general scenarios. It therefore provides a theoretical benchmark to study the effects that supply chains have under an ideal environment. In this way, it complements the recent literature as it helps researchers distinguish which empirical regularities can be explained by market mechanisms and which are a consequence of market failures and externalities.