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Business networks, production chains and productivity: A theory of input-output architecture

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  • Ezra Oberfield

Abstract

This paper studies an analytically tractable model of the formation and evolution of chains of production. Over time, entrepreneurs accumulate techniques to produce their good using goods produced by other entrepreneurs and labor as inputs. The value of a technique depends on both the productivity embodied in the technique and the cost of the particular input; when producing, each entrepreneur selects the technique that delivers the best combination. The collection of known production techniques form a dynamic network of potential chains of production: the input-output architecture of the economy. Aggregate productivity depends on whether the lower cost firms are the important suppliers of inputs. When the share of intermediate goods in production is high, the lower cost firms are selected as suppliers more frequently. This raises aggregate productivity and also increases the concentration of sales of intermediate goods.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2011-12.

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Date of creation: 2011
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Handle: RePEc:fip:fedhwp:wp-2011-12

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Keywords: Productivity ; Labor market;

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References

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  1. Chaney, Thomas, 2011. "The Network Structure of International Trade," CEPR Discussion Papers 8240, C.E.P.R. Discussion Papers.
  2. Andrew T. Foerster & Pierre-Daniel G. Sarte & Mark W. Watson, 2011. "Sectoral versus Aggregate Shocks: A Structural Factor Analysis of Industrial Production," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 1 - 38.
  3. Vasco M Carvalho, 2008. "Aggregate Fluctuations and the Network Structure of Intersectoral Trade," 2008 Meeting Papers 1062, Society for Economic Dynamics.
  4. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2010. "Cascades in Networks and Aggregate Volatility," NBER Working Papers 16516, National Bureau of Economic Research, Inc.
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Cited by:
  1. Vasco Carvalho & Nico Voigtländer, 2014. "Input Diffusion and the Evolution of Production Networks," Working Papers 759, Barcelona Graduate School of Economics.
  2. Vasco Carvalho & Nico Voigtländer, 2014. "Input diffusion and the evolution of production networks," Economics Working Papers 1418, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Thorsten Drautzburg, 2013. "Entrepreneurial tail risk: implications for employment dynamics," Working Papers 13-45, Federal Reserve Bank of Philadelphia.
  4. Vasco M. Carvalho & Nico Voigtländer, 2014. "Input Diffusion and the Evolution of Production Networks," NBER Working Papers 20025, National Bureau of Economic Research, Inc.

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