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
DO - 10.3386/w16516
UR - http://www.nber.org/papers/w16516
L1 - http://www.nber.org/papers/w16516.pdf
N1 - Author contact info:
Daron Acemoglu
Department of Economics, E18-269D
MIT
77 Massachusetts Avenue
Cambridge, MA 02139
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 -