Distortions in Production Networks
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.
We thank Daron Acemoglu, Marios Angeletos, Enghin Atalay, David Baqaee, Vasco Carvalho, Gabriel Chodorow-Reich, Mark Gertler, Michael Gofman, Bob Hall, James Hamilton, Pat Kehoe, Pete Klenow, Ricardo Lagos, Ezra Oberfield, Valerie Ramey, Ricardo Reis, Alireza Tahbaz-Salehi, and Pierre-Daniel Sarte for their valuable feedback and suggestions. We owe special thanks to V.V. Chari, Ian Dew-Becker, Chad Jones, Marco Ortiz, and Alberto Trejos for their insightful conference discussions of this paper. Finally, we have benefited greatly from the comments received in numerous conferences and seminars. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Saki Bigio & Jennifer La’O, 2020. "Distortions in Production Networks*," The Quarterly Journal of Economics, vol 135(4), pages 2187-2253.