NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Cascades in Networks and Aggregate Volatility

Daron Acemoglu, Asuman Ozdaglar, Alireza Tahbaz-Salehi

NBER Working Paper No. 16516
Issued in November 2010
NBER Program(s):   IO

We provide a general framework for the study of cascade effects created by interconnections between sectors, firms or financial institutions. Focusing on a multi sector economy linked through a supply network, we show how structural properties of the supply network determine both whether aggregate volatility disappears as the number of sectors increases (i.e., whether the law of large numbers holds) and when it does, the rate at which this happens. Our main results characterize the relationship between first order interconnections (captured by the weighted degree sequence in the graph induced by the input-output relations) and aggregate volatility, and more importantly, the relationship between higher-order interconnections and aggregate volatility. These higher-order interconnections capture the cascade effects, whereby low productivity or the failure of a set of suppliers propagates through the rest of the economy as their downstream sectors/firms also suffer and transmit the negative shock to their downstream sectors/firms. We also link the probabilities of tail events (large negative deviations of aggregate output from its mean) to sector-specific volatility and to the structural properties of the supply network.

download in pdf format
   (524 K)

email paper

This paper is available as PDF (524 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16516

Published: (With Vasco Carvalho, Asuman Ozdaglar, Alireza Tahbaz - Salehi ) Network Origins of Aggregate Fluctuat ions, September 2012, Econometrica , 80(5), pp.1977 - 2016.

Users who downloaded this paper also downloaded these:
Acemoglu, Ozdaglar, and Tahbaz-Salehi w18727 Systemic Risk and Stability in Financial Networks
Acemoglu, Bimpikis, and Ozdaglar w16410 Dynamics of Information Exchange in Endogenous Social Networks
Acemoglu, Dahleh, Lobel, and Ozdaglar w14040 Bayesian Learning in Social Networks
Acemoglu, Ozdaglar, and Tahbaz-Salehi w19230 The Network Origins of Large Economic Downturns
Gabaix w15286 The Granular Origins of Aggregate Fluctuations
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us