The Epidemiology of Financial Constraints
55 Pages Posted: 1 Sep 2021 Last revised: 2 Feb 2022
Date Written: January 31, 2022
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
Suggested Citation: Suggested Citation