Input Diffusion and the Evolution of Production Networks

55 Pages Posted: 24 Mar 2015

See all articles by Vasco M. Carvalho

Vasco M. Carvalho

Universitat Pompeu Fabra/CREI; Centre for Economic Policy Research (CEPR); University of Cambridge

Nico Voigtländer

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: March 2015

Abstract

The adoption and diffusion of inputs in the production network is at the heart of technological progress. What determines which inputs are initially considered and eventually adopted by innovators? We examine the evolution of input linkages from a network perspective, starting from a stylized model of network formation. Producers direct their search for new inputs along vertical linkages, screening the network neighborhood of existing suppliers to identify potentially useful inputs. A subset of these is then adopted, following a tradeoff between the benefits from input variety and the costs of customizing new inputs. Guided by this framework, we document a novel stylized fact at both the sector and the firm level: producers are more likely to adopt inputs that are already used - directly or indirectly - by their current suppliers. In particular, using disaggregated input-output data, we show that initial network proximity of a sector in 1967 significantly increases the likelihood of adoption throughout the subsequent four decades. A one-standard deviation decrease in network distance is associated with an increase in the adoption probability by one third to one half. Similarly, U.S. firms are significantly more likely to develop new input linkages among their suppliers' network neighborhood. Our results imply that the existing production network plays a crucial role in the diffusion of inputs and the evolution of technology.

Keywords: directed network search, dynamics of production networks, input adoption

JEL Classification: C67, D57, L23, O33

Suggested Citation

Carvalho, Vasco M. and Voigtländer, Nico, Input Diffusion and the Evolution of Production Networks (March 2015). CEPR Discussion Paper No. DP10498, Available at SSRN: https://ssrn.com/abstract=2584016

Vasco M. Carvalho (Contact Author)

Universitat Pompeu Fabra/CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

HOME PAGE: http://www.crei.cat/people/carvalho/welcome.html

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Nico Voigtländer

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
+1-310-794 6382 (Phone)

HOME PAGE: http://www.anderson.ucla.edu/faculty/nico.v/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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