Bias Propagation in Economically Linked Firms

Abstract

We document that managerial biases spread across firms along supply chains. Supporting a causal interpretation, we show that beliefs trickle up the supply chain, not down, and that biases in supplier forecasts are only affected by customer forecasts issued before, not after, the supplier's forecast. We further find that bias propagation increases when suppliers have less confidence in their own views and when the perceived precision and importance of customer forecasts increase. Biases cause changes in the corporate policies of suppliers, suggesting that contagious beliefs in production networks contribute to fluctuations of business and financing cycles.

Keywords: Bias propagation, Managerial optimism, Production networks

JEL Classification: G4, D8, D9, G3, D2