Financial Constraints and Propagation of Shocks in Production Networks

69 Pages Posted: 14 Oct 2020

See all articles by Banu Demir Pakel

Banu Demir Pakel

affiliation not provided to SSRN

Beata Smarzynska Javorcik

affiliation not provided to SSRN

Tomasz Kamil Michalski

HEC Paris - Economics & Decision Sciences

Evren Ors

HEC Paris - Finance Department

Date Written: 2020

Abstract

This study finds that even small unexpected supply shocks propagate downstream through production networks and are amplified by firms with short-term financial constraints. The unexpected 2011 increase in the tax on imports purchased with foreign-sourced trade credit is examined using data capturing almost all Turkish supplier-customer links. The identification strategy exploits the heterogeneous impact of the shock on importers. The results indicate that this relatively minor, non-localized shock had a non-trivial economic impact on exposed firms and propagated downstream through affected suppliers. Additional empirical tests, motivated by a simple theory, demonstrate that low-liquidity firms amplified its transmission.

Keywords: production networks, shock transmission, financing constraints, liquidity

JEL Classification: F140, F610, G230, L140, E230

Suggested Citation

Pakel, Banu Demir and Javorcik, Beata Smarzynska and Michalski, Tomasz K. and Ors, Evren, Financial Constraints and Propagation of Shocks in Production Networks (2020). CESifo Working Paper No. 8607, Available at SSRN: https://ssrn.com/abstract=3710349

Banu Demir Pakel (Contact Author)

affiliation not provided to SSRN

No Address Available

Beata Smarzynska Javorcik

affiliation not provided to SSRN

No Address Available

Tomasz K. Michalski

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

Evren Ors

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
+33 1 3967 7123 (Phone)
+33 1 3967 7085 (Fax)

HOME PAGE: http://www.hec.fr/ors

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