Distortions in Production Networks

99 Pages Posted: 2 May 2016 Last revised: 11 Sep 2021

See all articles by Saki Bigio

Saki Bigio

University of California, Los Angeles (UCLA) - Department of Economics

Jennifer La’O

Columbia University

Date Written: April 2016


How does an economy's production structure determine its macroeconomic response to sectoral distortions? We study a static framework in which production is organized in an input-output network and firms' production decisions are distorted. We show how sectoral distortions manifest at the aggregate level via two channels: total factor productivity and the labor wedge. The strength of each channel depends jointly on the input-output structure and the distribution of shocks. Near efficiency, distortions generate zero first-order effects on TFP but non-zero first-order effects on the labor wedge; the latter we show to be determined by the sector's network "centrality." We apply the model to the 2008-09 Financial Crisis and find that the U.S. input-ouput network may have amplified financial distortions by roughly a factor of two relative to a counterfactual economy devoid of intermediate good trade.

Suggested Citation

Bigio, Saki and La’O, Jennifer, Distortions in Production Networks (April 2016). NBER Working Paper No. w22212, Available at SSRN: https://ssrn.com/abstract=2773442

Saki Bigio (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Jennifer La’O

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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