Distress propagation on production networks: Coarse-graining and modularity of linkages

Distress propagation occurs in connected networks, its rate and extent being dependent on network topology. To study this, we choose economic production networks as a paradigm. An economic network can be examined at many levels — linkages among individual agents (microscopic), among firms/sectors (mesoscopic) or among countries (macroscopic). New emergent dynamical properties appear at every level, so the granularity matters. For viral epidemics, even an individual node may act as an epicenter of distress and potentially affect the entire network. Economic networks, however, are known to be immune at the micro-levels and more prone to failure in the meso/macro-levels. We propose a dynamical interaction model to characterize the mechanism of distress propagation, across different modules of a network, initiated at different epicenters. Vulnerable modules often lead to large degrees of destabilization. We demonstrate our methodology using a unique empirical data-set of input–output linkages across 0.14 million firms in one administrative state of India, a developing economy. The network has multiple hub-and-spoke structures that exhibits moderate disassortativity, which varies with the level of coarse-graining. The novelty lies in characterizing the production network at different levels of granularity or modularity, and finding ‘too-big-to-fail’ modules supersede ‘too-central-to-fail’ modules in distress propagation.