Cascades and Fluctuations in an Economy with an Endogenous Production Network

85 Pages Posted: 26 Sep 2019 Last revised: 7 Jun 2022

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2020

Abstract

This paper studies an economy in which firms are connected through input-output linkages and must pay a fixed cost to produce. When economic conditions are poor, some firms might decide not to operate, thereby severing the links with their neighbors and changing the structure of the production network. In the model, producers benefit from having access to additional suppliers, and so nearby firms tend to operate, or not, together. As a result, the production network features clusters of operating firms, and the exit of a producer can create a cascade of firm shutdowns. While well-connected firms are better able to withstand shocks, they trigger larger cascades upon exit. The theory also predicts how the structure of the production network changes over the business cycle. As in the data, recessions are associated with more dispersed networks that feature fewer highly connected firms. In the calibrated economy, the endogenous reorganization of the network substantially dampens the impact of idiosyncratic shocks on aggregate fluctuations.

Keywords: cascades, network, formation, fluctuations, input-output

JEL Classification: E23, D85, C67

Suggested Citation

Taschereau-Dumouchel, Mathieu, Cascades and Fluctuations in an Economy with an Endogenous Production Network (March 25, 2020). Available at SSRN: https://ssrn.com/abstract=3115854 or http://dx.doi.org/10.2139/ssrn.3115854

Mathieu Taschereau-Dumouchel (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

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