Economics of Networks
Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM
- Chair: Stephen James Redding, Princeton University
Misallocation in the Market for Inputs: Enforcement and the Organization of Production
AbstractThe strength of contract enforcement determines how firms source inputs and organize production. Using microdata on Indian manufacturing plants, we show that production and sourcing decisions appear systematically distorted in states with weaker enforcement. Specifically, we document that in industries that tend to rely more heavily on relationship-specific intermediate inputs, plants in states with more congested courts shift their expenditures away from intermediate inputs and appear to be more vertically integrated. To quantify the impact of these distortions on aggregate productivity, we construct a model in which plants have several ways of producing, each with different bundles of inputs. Weak enforcement exacerbates a holdup problem that arises when using inputs that require customization, distorting both the intensive and extensive margins of input use. The equilibrium organization of production and the network structure of input-output linkages arise endogenously from the producers' simultaneous cost minimization decisions. We identify the structural parameters that govern enforcement frictions from cross-state variation in the first moments of producers' cost shares. A set of counterfactuals show that enforcement frictions lower aggregate productivity to an extent that is relevant on the macro scale.
Cascades and Fluctuations in an Economy with an Endogenous Production Network
AbstractThis paper proposes a simple theory of production in which the network of input-output linkages is endogenously determined by the decision of the firms to operate or not. Since producers benefit from having multiple suppliers, the economy features complementarities between the operating decisions of nearby firms. As a result, tightly connected clusters of producers emerge around productive firms. In addition, after a firm is hit by a severe shock, a cascade of shutdowns might spread from neighbor to neighbor as the network reorganizes itself. While well-connected firms are better able to withstand shocks, they trigger larger cascades upon shut down, a prediction confirmed by U.S. data. The theory also predicts how the shape of the network interacts with the business cycle. As in the data, periods of low economic activity feature less clustering among firms, and are associated with thinner tails for the degree distributions. Finally, allowing the network to reorganize itself in response to idiosyncratic shocks leads to substantially smaller variations in aggregate output, suggesting that endogenous changes in the shape of the production network have a significant impact on the aggregation of microeconomic shocks into macroeconomic fluctuations.
- E1 - General Aggregative Models
- D2 - Production and Organizations