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Production Networks

Paper Session

Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM

Marriott Philadelphia Downtown, Grand Ballroom Salon B
Hosted By: American Economic Association
  • Chair: Alireza Tahbaz-Salehi, Columbia University

Distortions and the Structure of the World Economy

Aleh Tsyvinski
Yale University
Lorenzo Caliendo
Yale University
Fernando Parro
Johns Hopkins University


We develop a model of the world economy as input-output relationships subject to distortions. The base units of our analysis are the country-sectors demanding and supplying output across and within countries. Our first analytical result is to develop a methodology to solve the identification problem, common to the literature on misallocation in input-output relationships, of separating sectoral TFPs from the sectoral distortions. Using both the input shares and the consumption shares within the CES production and CES consumption structure we derive simple closed-form sufficient statistics for the sectoral distortions and for the sectoral TFPs. Our second analytical result is to derive a closed-form solution of the elasticities of each entry in the world input-output matrix to the distortions in a given country-sector pair. We compute a total of more than two million distortions per year and TFPs for 1,400 country-sector pairs for 1995-2011 and document significant heterogeneity of those across countries and sectors. We then calculate the whole matrix of about two million elasticities to distortions and TFPs of the input-output matrix of the world economy. We show that internal (within a given country) distortions significantly affect the structure of the economy of that country and have sizeable cross effects on the input-output matrix of other countries. We rank the impacts of the individual country-sector distortions on the world’s GDP. We then show that the elasticity to changes in internal distortions is an order of magnitude larger than that of the external (across countries) distortions. Finally, we compute the change in global input-output shares and world’s real GDP elasticity to the actual changes in internal distortions over the period 1995-2011.

Endogenous Production Networks

Daron Acemoglu
Massachusetts Institute of Technology
Pablo Azar
Massachusetts Institute of Technology


We develop a tractable model of endogenous production networks. Each one of a number of products can be produced by combining labor and an endogenous subset of the other products as inputs. Different combinations of inputs generate (prespecified) levels of productivity. Markets are “contestable” in the sense that production technologies are available to a large number of potential producers. We establish the existence and uniqueness of an equilibrium with an endogenous production network and provide comparative static results on how prices and endogenous technology choices (and thus the production network) respond to changes in parameters. These results show that improvements in technology (or reductions in distortions) spread throughout the economy via input-output linkages and reduce all prices, and under reasonable restrictions on the menu of production technologies, also lead to a denser production network. Using a dynamic version of the model, we show that the endogenous evolution of the production network could be a powerful force towards sustained economic growth. At the root of this result is the fact that the arrival of a few new products expands the set of technological possibilities of all existing industries by a large amount — that is, if there are n products, the arrival of one more new product increases the combinations of inputs that each existing product can use from 2^{n-1} to 2^{n} , thus enabling significantly more pronounced cost reductions from the choice of optimal technology combinations. These cost reductions then spread to other industries that benefit from lower input prices and are further incentivized to adopt additional inputs.

IO in I-O: Size, Industrial Organization and the Input-Output Network Make a Firm Structurally Important

Basile Grassi
Bocconi University


There is a growing literature suggesting that firm level productivity shocks can help understand macroeconomic level outcomes. However, existing models are very restrictive regarding the nature of competition within sector and its implication for the propagation of shocks across the input-output (I-O) network. This paper offers a more comprehensive understanding of how firm level shocks can shape aggregate dynamics. To this end, I build a tractable multi-sector heterogeneous firm general equilibrium model featuring oligopolistic competition and an I-O network. It is shown that a positive shock to a large firm increases both the productivity and the markup at the sector level. By reducing the sector price, the change in productivity propagates only to downstream sectors. Conversely, the change in markup, by increasing price and reducing demand for intermediate inputs, propagates both to downstream and upstream sectors. The sensitivity of aggregate output to firms' shocks is determined by the sector's (i) Herfindahl Index, which measures the competition intensity of the sector, (ii) position in the input-output network, which measures the direct and indirect importance of this sector for the household, and (iii) the profit share along the supply chain, which relates to the changes in demand to upstream sectors.

Supply Chain Disruptions: Evidence From the Great East Japan Earthquake

Vasco Carvalho
University of Cambridge
Makoto Nirei
Ministry of Finance-Japan
Yukiko Saito
Research Institute of Economy, Trade and Industry
Alireza Tahbaz-Salehi
Columbia University


Exploiting the exogenous and regional nature of the Great East Japan Earthquake of 2011, this
paper provides a systematic quantification of the role of input-output linkages as a mechanism
for the propagation and amplification of shocks. We document that the disruption caused by the
earthquake and its aftermaths propagated upstream and downstream supply chains, affecting the
direct and indirect suppliers and customers of disaster-stricken firms. We then use our empirical
findings to obtain an estimate for the overall macroeconomic impact of the shock by taking these
propagation effects into account. We find that the propagation of the shock over input-output
linkages can account for a 1.2 percentage point decline in Japan’s gross output in the year following
the earthquake. We interpret these findings in the context of a general equilibrium model that
takes the firm-to-firm linkages into account explicitly.
JEL Classifications
  • E0 - General