Financial Constraints and Propagation of Shocks in Production Networks
69 Pages Posted: 14 Oct 2020
Date Written: 2020
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
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