The Horizontal Geometry of Production Networks

Complementarities in intermediate inputs trigger the even transmission of asymmetric shocks in production networks. This paper linearly captures these complementarities through shared inter-sectoral trade relationships, and makes two novel contributions to the understanding of networked economies. First, it introduces a theoretical framework that distinguishes between factor input demand and factor input supply network distances, measuring economic distance between sectors based on common upstream sellers or downstream buyers. These horizontal interdependencies determine how sector-specific shocks transmit horizontally across the network, complementing and balancing the standard vertical (Leontief inverse) mechanism. Second, using sector-level U.S. employment data, the paper provides empirical evidence that positive employment shocks in closely demand- or supply-connected sectors are attenuated, whereas larger distances generate employment comovement. Together, these two contributions reveal that the horizontal geometry of a production network plays a critical role in understanding how sectoral interactions propagate micro-originated shocks in an Input-Output economy.