The Epidemiology of Financial Constraints

Abstract

We use network regressions to quantify the spillover effects of financial constraints on investment in production networks. We estimate that these spillovers permeate the supply chain and induce a network multiplier that roughly doubles the forgone investment initially imposed by financial constraints. These effects propagate primarily upstream, and they strongly influence supply chain network formation. To facilitate identification, we exploit a Network Regression Discontinuity Design to quantify the spillover effects of loan covenant violations for supply chain partners’ investments. Overall, we show that ignoring spillovers may considerably understate the consequences of financial constraints on aggregate investment behavior.

Keywords: Financial Constraints, Propagation, Supply Chain Networks, Corporate Investment, Network Regression, SUTVA, Regression Discontinuity, Spatial Econometrics, Network Formation

JEL Classification: C21, D22, D85, E23, G31, L14, L21, L23, L25