Following the Informational Footsteps of the Supply Chain Tracks

We develop an endogenous production network economy model coupled with incomplete information, where the degree of information at the firm-level is the engine of the network formation and distorts both producers’ decision and the aggregate allocations of the economy. To tie this relationship, we consider that producers find their suppliers through a decentralized search given their level of information, in which firms are more or less informed depending on how many linkages of the production network they know. In our model, we establish the existence, uniqueness and efficiency of the network equilibrium for a given level of information, and show that the higher the level of information, (i) the more stable the network, (ii) the lower the density of the network, and (iii) the higher the spillover impact of a productivity shock on the aggregate output. We also design an optimal contract to show that the combination of informationenhancing policies and tax-subsidies is able to mimic a Walrasian full information equilibrium. Finally, we use a proprietary dataset that covers a large share of Brazilian financial transactions to investigate stylized facts about information and network formation as well as test empirically the implication of our model.