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Friend-of-a-Friend in Production Networks: Micro Estimates and Macro Implications

Author

Listed:
  • Hiroyuki Asai

    (Graduate School of Economics, The University of Tokyo,)

  • Makoto Nirei

    (Graduate School of Economics, The University of Tokyo,)

Abstract

We quantify the friend-of-a-friend effect in production networks, where shared partners act as relational capital facilitating new links. We develop a general equilibrium (GE) model that endogenizes link formation and incorporates the friend-of-a-friend mechanism. We show the model reduces to a dyad-level logit specification, enabling estimation via a quadruple-based conditional logit. Using Japanese firm-to-firm transaction data, we find a sizable friend-of-a-friend effect, comparable in magnitude to the effects of geographical distance and sectoral proximity. Counterfactual simulations in a calibrated GE model indicate that eliminating the mechanism reduces aggregate output by 0.6% and reshapes firm-level shock propagation by changing network topology.

Suggested Citation

  • Hiroyuki Asai & Makoto Nirei, 2025. "Friend-of-a-Friend in Production Networks: Micro Estimates and Macro Implications," CARF F-Series CARF-F-608, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf608
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    References listed on IDEAS

    as
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