Econometric Analysis of Production Networks with Dominant Units

61 Pages Posted: 14 Oct 2016 Last revised: 17 Oct 2016

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Cynthia Fan Yang

Florida State University - Department of Economics

Date Written: October 9, 2016

Abstract

This paper builds on the work of Acemoglu et al. (2012) and considers a production network with unobserved common technological factor and establishes general conditions under which the network structure contributes to aggregate fluctuations. It introduces the notions of strongly and weakly dominant units, and shows that at most a finite number of units in the network can be strongly dominant, while the number of weakly dominant units can rise with N (the cross section dimension). This paper further establishes the equivalence between the highest degree of dominance in a network and the inverse of the shape parameter of the power law. A new extremum estimator for the degree of pervasiveness of individual units in the network is proposed, and is shown to be robust to the choice of the underlying distribution. Using Monte Carlo techniques, the proposed estimator is shown to have satisfactory small sample properties. Empirical applications to US input-output tables suggest the presence of production sectors with a high degree of pervasiveness, but their effects are not sufficiently pervasive to be considered as strongly dominant.

Keywords: aggregate fluctuations, strongly and weakly dominant units, spatial models, outdegrees, degree of pervasiveness, power law, input-output tables, US economy

JEL Classification: C12, C13, C23, C67, E32

Suggested Citation

Pesaran, M. Hashem and Yang, Cynthia Fan, Econometric Analysis of Production Networks with Dominant Units (October 9, 2016). USC-INET Research Paper No. 16-25. Available at SSRN: https://ssrn.com/abstract=2851148 or http://dx.doi.org/10.2139/ssrn.2851148

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Cynthia Fan Yang

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States

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