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Distortions in Production Networks

Saki Bigio and Jennifer La’O

No 22212, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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)
Date: 2016-04
New Economics Papers: this item is included in nep-pr~ and nep-mac
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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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