TY - JOUR AU - Acemoglu,Daron AU - Ozdaglar,Asuman AU - Tahbaz-Salehi,Alireza TI - Cascades in Networks and Aggregate Volatility JF - National Bureau of Economic Research Working Paper Series VL - No. 16516 PY - 2010 Y2 - November 2010 UR - http://www.nber.org/papers/w16516 L1 - http://www.nber.org/papers/w16516.pdf N1 - Author contact info: Daron Acemoglu Department of Economics MIT, E52-380B 50 Memorial Drive Cambridge, MA 02142-1347 Tel: 617/253-1927 Fax: 617/253-1330 E-Mail: daron@mit.edu Asuman Ozdaglar Dept of Electrical Engineering and Computer Science Massachusetts Institute of Technology 77 Massachusetts Ave, E40-130 Cambridge, MA 02139 E-Mail: asuman@mit.edu Alireza Tahbaz-Salehi Columbia Business School 3022 Broadway, 418 Uris Hall New York, NY 10027 E-Mail: alirezat@columbia.edu AB - 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. ER -