Production Networks, Capital Dynamics, and Heterogeneous Agents

Giulio Bottazzi, Daniele Giachini and Eleonora Priori

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

Abstract: We develop a general equilibrium production network model that spans two periods and incorporates heterogeneous households, firm-specific Cobb-Douglas production technologies, and a time-to-build mechanism for capital formation. Within this dynamic framework, we establish the existence and uniqueness of a competitive equilibrium and provide explicit analytical solutions for key economic variables. In particular, we derive closed-form expressions for the welfare and real interest rate effects of supply-side shocks occurring at different points in time. We calibrate the model using input-output data from the Italian economy, identifying key structural features such as the prominent roles of the real estate, food, and tourism-related sectors. We then extend the calibration to incorporate household heterogeneity by skill level and examine the consequences in terms of welfare and real interest rates of a climate-related productivity shock. This shock is sector-specific, time-dependent, and scaled according to differential exposure to climate risks. Our results show that climate-induced negative supply-side shocks generate disproportionate welfare losses for low-skilled households and induce nontrivial adjustments in real interest rates across sectors.

Keywords: Production Network; Capital Formation; Heterogeneous Agents; Two-date Model (search for similar items in EconPapers)
Date: 2025-05-27
New Economics Papers: this item is included in nep-dge and nep-net
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