Production Networks and War

48 Pages Posted: 4 Feb 2022

See all articles by Vasily Korovkin

Vasily Korovkin

CERGE-EI

Alexey Makarin

Einaudi Institute for Economics and Finance (EIEF)

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Date Written: November 2021

Abstract

How do severe shocks such as war alter the economy? We study how a country's production network is affected by a devastating but localized conflict. Using unique transaction-level data on Ukrainian railway shipments, we uncover several novel indirect effects of conflict on firms. First, we document substantial propagation effects on interfirm trade---trade declines even between partners outside the conflict areas if one of them had traded with those areas before the start of the war. The magnitude of such second-degree effect of conflict is one-third of the first-degree effect. Ignoring this propagation would lead to an underestimate of the total impact of conflict on trade by about 67%. Second, war induces sudden changes in the production-network structure that influence firm performance. Specifically, we find that firms that exogenously became more central---after the conflict practically cut off certain regions from the rest of Ukraine---received a relative boost to their revenues and profits. Finally, in a production-network model, we separately estimate the effects of the exogenous firm removal and the subsequent endogenous network adjustment on firm revenue distribution. At the median, network adjustment compensates for 80% of the network-destruction effect a year after the conflict onset.

Keywords: conflict, firms, production networks, Trade

JEL Classification: D22, D74, F14, F51, H56

Suggested Citation

Korovkin, Vasily and Makarin, Alexey, Production Networks and War (November 2021). CEPR Discussion Paper No. DP16759, Available at SSRN: https://ssrn.com/abstract=4026602

Vasily Korovkin (Contact Author)

CERGE-EI ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic

HOME PAGE: http://www.vaskorovkin.com

Alexey Makarin

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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