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


  • Ezra Oberfield


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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  • Ezra Oberfield, 2011. "Business networks, production chains and productivity: A theory of input-output architecture," Working Paper Series WP-2011-12, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2011-12

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    1. 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.
    2. Thomas Chaney, 2014. "The Network Structure of International Trade," American Economic Review, American Economic Association, vol. 104(11), pages 3600-3634, November.
    3. Kelly, M., 1996. "The Dynamics of Smithian growth," Papers 96/9, College Dublin, Department of Political Economy-.
    4. Morgan Kelly, 1997. "The Dynamics of Smithian Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 939-964.
    5. 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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    Productivity ; Labor market;

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