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IO in I-O: Competition and Volatility in Input-Output Networks

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  • Basile Grassi

    (University of Oxford)

Abstract

There is a growing literature suggesting that firm level productivity shocks can help understandmacroeconomic level outcomes. However, existingmodels are very restrictive regarding the nature of competition within sector and its implication for the propagation of shocks across the input-output (I-O) network. The goal of this paper is to offer amore comprehensive understanding of how firm level shocks can shape aggregate dynamics. To this end, I build a tractablemulti-sector heterogeneous firm general equilibrium model featuring oligopolistic competition and an I-O network. It is shown that a positive shock to a large firm increases both the average productivity and the Herfindahl Index in its sector. By reducing the sector price, the change in average productivity propagates only to downstream sectors. Conversely, the change in the Herfindahl Index, by increasing price and reducing demand for intermediate inputs, propagates both to downstream and upstream sectors. The sensitivity of aggregate volatility to firms’ shocks is determined by the sector’s (i) Herfindahl Index, which measures the volatility of the sector, (ii) position in the input-output network, which measures the direct and indirect importance of this sector for the household, and (iii) relativemarket power in the supply chain, which relates to the changes in demand to upstreamsectors.

Suggested Citation

  • Basile Grassi, 2017. "IO in I-O: Competition and Volatility in Input-Output Networks," 2017 Meeting Papers 1637, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1637
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    References listed on IDEAS

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    Cited by:

    1. Vaziri, M., 2022. "Antitrust Law and Business Dynamism," Janeway Institute Working Papers 2219, Faculty of Economics, University of Cambridge.
    2. Huremovic, Kenan & Jiménez, Gabriel & Moral-Benito, Enrique & Vega-Redondo, Fernando & Peydró, José-Luis, 2020. "Production and financial networks in interplay: Crisis evidence from supplier-customer and credit registers," EconStor Preprints 222281, ZBW - Leibniz Information Centre for Economics.
    3. David Rezza Baqaee & Emmanuel Farhi, 2019. "The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem," Econometrica, Econometric Society, vol. 87(4), pages 1155-1203, July.
    4. David Rezza Baqaee & Emmanuel Farhi, 2018. "Macroeconomics with Heterogeneous Agents and Input-Output Networks," NBER Working Papers 24684, National Bureau of Economic Research, Inc.
    5. Fabio Ghironi, 2018. "Macro needs micro," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 195-218.
    6. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2018. "The Micro Origins of International Business-Cycle Comovement," American Economic Review, American Economic Association, vol. 108(1), pages 82-108, January.
    7. Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2017. "Price Rigidities and the Granular Origins of Aggregate Fluctuations," CESifo Working Paper Series 6619, CESifo.
    8. David Rezza Baqaee & Emmanuel Farhi, 2020. "Productivity and Misallocation in General Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 135(1), pages 105-163.
    9. Rajssa Mechelli & Andrea Colciago, 2020. "Competition and Inequality," Economics Series Working Papers 914, University of Oxford, Department of Economics.
    10. Distante, Roberta & Petrella, Ivan & Santoro, Emiliano, 2018. "Gibrat’s law and quantile regressions: An application to firm growth," Economics Letters, Elsevier, vol. 164(C), pages 5-9.
    11. Emmanuel Dhyne & Glenn Magerman & Ayumu Ken kikkawa, 2019. "Imperfect Competition in Firm-to-Firm Trade," Working Papers ECARES 2019-05, ULB -- Universite Libre de Bruxelles.
    12. David Rezza Baqaee, 2018. "Cascading Failures in Production Networks," Econometrica, Econometric Society, vol. 86(5), pages 1819-1838, September.
    13. Bosker, Maarten & Westbrock, Bastian, 2018. "The network origins of the gains from trade," CEPR Discussion Papers 13285, C.E.P.R. Discussion Papers.
    14. Ernesto Pasten & Raphael Schoenle & Michael Weber, 2017. "Price Rigidity and the Origins of Aggregate Fluctuations," NBER Working Papers 23750, National Bureau of Economic Research, Inc.
    15. Vaziri, M., 2022. "Antitrust Law and Business Dynamism," Cambridge Working Papers in Economics 2243, Faculty of Economics, University of Cambridge.
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