Spillovers and Redistribution through Intra-Firm Networks: The Product Replacement Channel
85 Pages Posted: 13 Nov 2019 Last revised: 13 Jan 2020
Date Written: November 8, 2019
This paper studies how regional shocks spill over across U.S. local markets through intra-firm market networks and explores how such spillovers reshape household welfare across regions. We link data on barcode-region-level prices and quantities with producer-level information to exploit variation in firms' initial exposure to differential drops in local house prices in the 2007-09 recession. We show that a firm's local sales decrease in response to not only direct negative local demand shock but also indirect negative local demand shocks originating in its other markets. Intra-firm cross-market spillover effects arise mainly from product creation and destruction, whereas direct local shock operates through the sales of continuing products. Spillover effects occur because (i) firms replace products that have higher value---sales per product, unit price, and organic sales share---with lower-value ones in response to negative demand shocks, and (ii) such product replacements are synchronized across many markets within each firm. Counterfactual analysis using an estimated multi-region model with endogenous quality adjustments shows that our channel works as a novel inter-regional shock transmission mechanism and generates an implicit regional redistribution effect. Such effect is economically sizable and comparable to the size of transfer policies implemented during the Great Recession.
Keywords: Network, Spillover, Product Creation, Regional Redistribution, Regional Risk-Sharing, the Great Recession, House Prices
JEL Classification: E20, E32, F44, L11, L22, R32
Suggested Citation: Suggested Citation