Distortions in Production Networks
Saki Bigio and
No 22212, NBER Working Papers from National Bureau of Economic Research, Inc
How does an economy's production structure determine its macroeconomic response to sectoral distortions? We study a static framework in which production is organized in an input-output network and firms' production decisions are distorted. We show how sectoral distortions manifest at the aggregate level via two channels: total factor productivity and the labor wedge. The strength of each channel depends jointly on the input-output structure and the distribution of shocks. Near efficiency, distortions generate zero first-order effects on TFP but non-zero first-order effects on the labor wedge; the latter we show to be determined by the sector's network "centrality." We apply the model to the 2008-09 Financial Crisis and find that the U.S. input-ouput network may have amplified financial distortions by roughly a factor of two relative to a counterfactual economy devoid of intermediate good trade.
JEL-codes: C67 E32 E42 G01 G10 (search for similar items in EconPapers)
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Published as Saki Bigio & Jennifer La’O, 2020. "Distortions in Production Networks*," The Quarterly Journal of Economics, vol 135(4), pages 2187-2253.
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Journal Article: Distortions in Production Networks* (2020)
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