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Cascades and Fluctuations in an Economy with an Endogenous Production Network

Author

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  • Mathieu Taschereau-Dumouchel

    (University of Pennsylvania Wharton Schoo)

Abstract

This paper proposes a simple theory of production in which the network of input-output linkages is endogenously determined by the firms' decisions to operate. Since producers benefit from having multiple suppliers, the economy features complementarities between the operating decisions of nearby firms. As a result, tightly connected clusters of producers emerge around productive firms. In addition, after a firm is hit by a severe shock, a cascade of shutdowns might spread from neighbor to neighbor as the network reorganizes itself. While well-connected firms are better able to withstand shocks, they trigger larger cascades upon shut down. The theory also predicts how the shape of the network interacts with the business cycle. As in the U.S. data, periods of low economic activity feature fewer well-connected producers and less clustering among firms. Once calibrated, the model predicts that allowing the network to reorganize itself in response to shocks leads to substantially smaller variations in aggregate output, suggesting that endogenous changes in the shape of the production network have a significant impact on the aggregation of microeconomic shocks into macroeconomic fluctuations.

Suggested Citation

  • Mathieu Taschereau-Dumouchel, 2017. "Cascades and Fluctuations in an Economy with an Endogenous Production Network," 2017 Meeting Papers 700, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:700
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    File URL: https://economicdynamics.org/meetpapers/2017/paper_700.pdf
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    References listed on IDEAS

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    1. Bak, Per & Chen, Kan & Scheinkman, Jose & Woodford, Michael, 1993. "Aggregate fluctuations from independent sectoral shocks: self-organized criticality in a model of production and inventory dynamics," Ricerche Economiche, Elsevier, vol. 47(1), pages 3-30, March.
    2. repec:aea:aejmac:v:9:y:2017:i:4:p:254-80 is not listed on IDEAS
    3. John Kennan, 2001. "Uniqueness of Positive Fixed Points for Increasing Concave Functions on Rn: An Elementary Result," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 893-899, October.
    4. David Rezza Baqaee, 2018. "Cascading Failures in Production Networks," Econometrica, Econometric Society, vol. 86(5), pages 1819-1838, September.
    5. Dupor, Bill, 1999. "Aggregation and irrelevance in multi-sector models," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 391-409, April.
    6. Enghin Atalay, 2017. "How Important Are Sectoral Shocks?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(4), pages 254-280, October.
    7. Michael Horvath, 1998. "Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 781-808, October.
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    Cited by:

    1. Grant, Everett & Yung, Julieta, 2019. "Upstream, Downstream & Common Firm Shocks," Globalization Institute Working Papers 360, Federal Reserve Bank of Dallas.
    2. Carvalho, Vasco M & Tahbaz-Salehi, Alireza, 2018. "Production Networks: A Primer," CEPR Discussion Papers 13421, C.E.P.R. Discussion Papers.
    3. Johannes Boehm & Ezra Oberfield, 2018. "Misallocation in the Market for Inputs: Enforcement and the Organization of Production," Sciences Po publications 2018-04, Sciences Po.
    4. Yoshiyuki ARATA & Philipp MUNDT, 2019. "Topology and Formation of Production Input Interlinkages: Evidence from Japanese microdata," Discussion papers 19027, Research Institute of Economy, Trade and Industry (RIETI).
    5. Daron Acemoglu & Pablo D. Azar, 2017. "Endogenous Production Networks," NBER Working Papers 24116, National Bureau of Economic Research, Inc.
    6. 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.
    7. repec:eee:moneco:v:102:y:2019:i:c:p:70-92 is not listed on IDEAS
    8. Dong, Feng & Wen, Yi, 2019. "Long and Plosser meet Bewley and Lucas," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 70-92.

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