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  5. Economic Network Formation
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Economic Network Formation

Paper Session

Sunday, Jan. 9, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Allison Luedtke, St. Olaf College

Supply Network Formation and Fragility

Ben Golub
,
Northwestern University
Matthew Elliott
,
Cambridge University
Matthew Leduc
,
Paris School of Economics

Abstract

We model the production of complex goods in a large supply network. Each firm sources several essential inputs through relationships with other firms. Individual supply relationships are at risk of idiosyncratic failure, which threatens to disrupt production. To protect against this, firms multisource inputs and strategically invest to make relationships stronger, trading off the cost of investment against the benefits of increased robustness. We find that equilibrium aggregate production is robust to idiosyncratic disruptions. Nevertheless, there is a regime in which arbitrarily small systemic shocks cause arbitrarily steep drops in output, so that the the supply network is fragile. The endogenous configuration of supply networks provides a new channel for the powerful amplification of shocks.

Decreasing Costs of Trade and the Impact of the Globalization of Supply Chains

Matthew O. Jackson
,
Stanford University
Matthew Elliott
,
Cambridge University

Abstract

We examine how decreasing trade costs change the structure of supply chains in a simple model of production and trade.   We show how the resulting increased specialization can lead to both increased fragility and lower levels of innovation.   We examine both national and international policies that overcome the relevant externalities and improve robustness of supply chains as well as innovation and growth.

The Anatomy of Financial Innovation

Ana Babus
,
Washington University in St. Louis
Matias Marzani
,
Washington University in St. Louis
Sara Moreira
,
Northwestern University

Abstract

The increase in the corporate demand for financial intermediation has been a key factor behind the unprecedented growth of the financial sector (Philippon, 2008). Indeed, issuances of financial securities have witnessed an extraordinary growth in the past four decades, both in dollar value as well as in the variety of contracts offered. In this paper we use data on innovation in corporate securities since 1970 from the Security Database Company to investigate the channels through which this increase took place. We do so through the lens of a model in which banks form a network of financial products, and issuers sort themselves across products. We investigate which financial firms are associated with financial innovation, and we are interested in whether growth occurs through improvements of existing securities or through the creation of brand new financial contracts.

Peer Effects with Endogenous Interactions

Vincent Boucher
,
Laval University
Asadul Islam
,
Monash University
Xiaodong Liu
,
University of Colorado-Boulder
Yves Zenou
,
Monash University

Abstract

We present a model where individuals simultaneously chose their targeted socialization efforts and their actions. An important feature of the model is that those two choices are not separable: payoffs from socialization are affected by individuals actions, and actions are affected by socialization choices. We fully characterize the equilibrium set. We show that even if the model typically features multiple equilibria, the model’s parameters can be estimated using a simple two-stage least square estimator. Moreover, under parametric assumptions on the distribution of the errors, we show that it is possible to infer which equilibrium is played in the data. We present two empirical applications. The first one looks at productivity spillovers among farmers in Bangladesh. The second one looks at academic achievement among American teenagers. In both cases, the equilibrium played in the data is the smallest equilibrium. Moreover, in both cases, we find that omitting the endogenous nature of social interactions leads to important biases on the estimated strength of social interactions.

Discussant(s)
Allison Luedtke
,
St. Olaf College
Ebehi Iyoha
,
Federal Reserve Bank of Boston
George Charlson
,
University of Cambridge
Carolina Mattsson
,
Leiden Institute of Advanced Computer Science
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • L1 - Market Structure, Firm Strategy, and Market Performance