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A firm's productivity depends on how production is organized given the level of demand for its product. To capture this mechanism, the authors develop a theory of an economy where firms with heterogeneous demands use labor and knowledge to produce. Entrepreneurs decide the number of layers of management and the knowledge and span of control of each agent. As a result, in the theory, heterogeneity in demand leads to heterogeneity in productivity and other firms' outcomes. They use the theory to analyze the impact of international trade on organization and calibrate the model to the U.S. economy.
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