Digitalization and Resilience to Disaggregate Shocks

How does digital technology affect the transmission of idiosyncratic shocks to the gross domestic product? We show that shock amplification depends on the elasticity of substitution and the relative abundance of inputs. Using an IV approach, we find a positive effect of digital intensity on substitution elasticities between capital and labor and between value-added and intermediate inputs, respectively. We interpret our empirical results through the lens of the technology choice literature, attributing the effect to a change in the curvature of the technology frontier. We show that whether a higher elasticity of substitution dampens the propagation of sectoral shocks or not depends on a simple sufficient statistic, the relative abundance of intermediate inputs. Based on the latter, our estimates suggest that many sectors in selected European economies amplify shocks after digitalization, with a deteriorating trend in resilience between 1995 and 2017.