Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks

Barrot, Jean‐Noël; Sauvagnat, Julien

doi:10.2139/ssrn.2427421

Cited by 31 publications

(34 citation statements)

References 37 publications

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“… These results are consistent with the empirical findings of Barrot and Sauvagnat (), who found that negative shocks to a firm have a greater impact on its partners if the affected firm produces less substitutable goods. …”

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confidence: 92%

Cascading Failures in Production Networks

2018

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This paper analyzes a general equilibrium economy featuring input‐output connections, imperfect competition, and external economies of scale owing to entry and exit. The interaction of input‐output networks with industry‐level market structure affects the amplification of shocks and the pattern of diffusion in the model, generating cascades of firm entry and exit across the economy. In this model, sales provide a poor measure of the systemic importance of industries. Unlike the relevant notions of centrality in competitive constant‐returns‐to‐scale models, systemic importance depends on the industry's role as both a supplier and a consumer of inputs, as well as the market structure of industries. A basic calibration of the model suggests that aggregate output is three times more volatile in response to labor productivity shocks when compared to a perfectly competitive model.

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confidence: 92%

Cascading Failures in Production Networks

2018

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“… The empirical literature on production networks, like Atalay (), Boehm, Flaaen, and Pandalai‐Nayar (), and Barrot and Sauvagnat (), all find that structural elasticities of substitution in production are significantly below 1, and sometimes very close to zero, across intermediate inputs, and between intermediate inputs and labor at business‐cycle frequencies. Furthermore, a voluminous literature on structural transformation, building on Baumol (), has found evidence in favor of non‐unitary elasticities of substitution in consumption and production across sectors over the long run. …”

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confidence: 99%

The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem

Baqaee¹,

Farhi

2019

ECTA

345

234

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We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced‐form nonparametric elasticities for efficient economies. We also show how microeconomic parameters are mapped to these reduced‐form general equilibrium elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond the first order to capture nonlinearities. Key features ignored by first‐order approximations that play a crucial role are: structural microeconomic elasticities of substitution, network linkages, structural microeconomic returns to scale, and the extent of factor reallocation. In a business‐cycle calibration with sectoral shocks, nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness), fat‐tailed (excess kurtosis), and has a negative mean, even when shocks are symmetric and thin‐tailed. Average output losses due to short‐run sectoral shocks are an order of magnitude larger than the welfare cost of business cycles calculated by Lucas (1987). Nonlinearities can also cause shocks to critical sectors to have disproportionate macroeconomic effects, almost tripling the estimated impact of the 1970s oil shocks on world aggregate output. Finally, in a long‐run growth context, nonlinearities, which underpin Baumol's cost disease via the increase over time in the sales shares of low‐growth bottleneck sectors, account for a 20 percentage point reduction in aggregate TFP growth over the period 1948–2014 in the United States.

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“…(), Ahern () shows that firms that are in central industries earn higher equity returns because they are more exposed to market risk. Barrot and Sauvagnat () show that input specificity in production networks propagates idiosyncratic shocks between suppliers and customers.…”

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confidence: 99%

Trade Network Centrality and Currency Risk Premia

Richmond¹

2019

The Journal of Finance

149

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I uncover an economic source of exposure to global risk that drives international asset prices. Countries that are more central in the global trade network have lower interest rates and currency risk premia. To explain these findings, I present a general equilibrium model in which central countries' consumption growth is more exposed to global consumption growth shocks. This causes the currencies of central countries to appreciate in bad times, resulting in lower interest rates and currency risk premia. Empirically, central countries' consumption growth covaries more with world consumption growth, further validating the proposed mechanism.

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Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks

Cited by 31 publications

References 37 publications

Cascading Failures in Production Networks

Cascading Failures in Production Networks

The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem

Trade Network Centrality and Currency Risk Premia

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