Cascading Failures in Production Networks

Baqaee, David

doi:10.3982/ecta15280

Cited by 161 publications

(124 citation statements)

References 61 publications

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“…Nonhomothetic aggregate final demand can arise from non-homothetic individual final demand or from the aggregation of heterogeneous but homothetic individual demands. In Baqaee andFarhi (2018b, 2019), we showed how to take these elements into account. In particular, in Baqaee and Farhi (2018b), we show how to combine input-output production networks with heterogeneous agents and non-homothetic final demand in closed economies.…”

Section: Baumol's Cost Disease and Long-run Growthmentioning

confidence: 99%

The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem

Baqaee¹,

Farhi

2019

ECTA

Self Cite

326

234

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We provide a nonlinear characterization of the macroeconomic impact of microeconomic productivity shocks in terms of reduced‐form nonparametric elasticities for efficient economies. We also show how microeconomic parameters are mapped to these reduced‐form general equilibrium elasticities. In this sense, we extend the foundational theorem of Hulten (1978) beyond the first order to capture nonlinearities. Key features ignored by first‐order approximations that play a crucial role are: structural microeconomic elasticities of substitution, network linkages, structural microeconomic returns to scale, and the extent of factor reallocation. In a business‐cycle calibration with sectoral shocks, nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness), fat‐tailed (excess kurtosis), and has a negative mean, even when shocks are symmetric and thin‐tailed. Average output losses due to short‐run sectoral shocks are an order of magnitude larger than the welfare cost of business cycles calculated by Lucas (1987). Nonlinearities can also cause shocks to critical sectors to have disproportionate macroeconomic effects, almost tripling the estimated impact of the 1970s oil shocks on world aggregate output. Finally, in a long‐run growth context, nonlinearities, which underpin Baumol's cost disease via the increase over time in the sales shares of low‐growth bottleneck sectors, account for a 20 percentage point reduction in aggregate TFP growth over the period 1948–2014 in the United States.

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Section: Baumol's Cost Disease and Long-run Growthmentioning

confidence: 99%

The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem

Baqaee¹,

Farhi

2019

ECTA

Self Cite

326

234

View full text Add to dashboard Cite

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“…Our paper relates to a growing literature on the role of input-output linkages in macroeconomics, including Long and Plosser (1983), Ciccone (2002), Gabaix (2011), Jones (2011), Acemoglu et al (2012), Acemoglu, Ozdaglar, and Tahbaz-Salehi (2017), Bartelme and Gorodnichenko (2015), Bigio and La'O (2016), Baqaee (2018), Fadinger, Ghiglino, and Teteryatnikova (2016), Liu (2017), Baqaee andFarhi (2019a, 2019b), and Caliendo, Parro, and Tsyvinski (2017). Some of these papers, including the last three, allow for non-Cobb-Douglas technologies and thus endogenize the intensity with which different inputs are used (and thus the different entries of the input-output matrix).…”

Section: Introductionmentioning

confidence: 99%

Endogenous Production Networks

Acemoğlu¹,

Azar²

2020

ECTA

144

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We develop a tractable model of endogenous production networks. Each one of a number of products can be produced by combining labor and an endogenous subset of the other products as inputs. Different combinations of inputs generate (prespecified) levels of productivity and various distortions may affect costs and prices. We establish the existence and uniqueness of an equilibrium and provide comparative static results on how prices and endogenous technology/input choices (and thus the production network) respond to changes in parameters. These results show that improvements in technology (or reductions in distortions) spread throughout the economy via inputoutput linkages and reduce all prices, and under reasonable restrictions on the menu of production technologies, also lead to a denser production network. Using a dynamic version of the model, we establish that the endogenous evolution of the production network could be a powerful force towards sustained economic growth. At the root of this result is the fact that the arrival of a few new products expands the set of technological possibilities of all existing industries by a large amount-that is, if there are n products, the arrival of one more new product increases the combinations of inputs that each existing product can use from 2 n−1 to 2 n , thus enabling significantly more pronounced cost reductions from choice of input combinations. These cost reductions then spread to other industries via lower input prices and incentivize them to also adopt additional inputs.

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“…This fragility of rich economies complements theories of "aggregate fluctuations" [59,60,19,61,62,32]. Those theories show how exogenous shocks to firms can result in large changes in the total production in the economy.…”

Section: Rich Yet Fragilementioning

confidence: 56%

“…One reason is heterogeneity: some firms and sectors are much larger [60] or more connected [19,61] than others, so a small shock to these important firms can have large consequences. The models in [60,19,61,62] are static and timeless, whereas our model is inherently dynamic, with most "shocks" caused by the endogenous failure of other firms. Another reason for aggregate fluctuations is that firms' inventories self-organize to a critical point [59].…”

Section: Rich Yet Fragilementioning

confidence: 99%

Contagious disruptions and complexity traps in economic development

Brummitt

Huremović

et al. 2017

Nat Hum Behav

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Poor economies not only produce less; they typically produce things that involve fewer inputs and fewer intermediate steps. Yet the supply chains of poor countries face more frequent disruptions---delivery failures, faulty parts, delays, power outages, theft, government failures---that systematically thwart the production process. To understand how these disruptions affect economic development, we model an evolving input--output network in which disruptions spread contagiously among optimizing agents. The key finding is that a poverty trap can emerge: agents adapt to frequent disruptions by producing simpler, less valuable goods, yet disruptions persist. Growing out of poverty requires that agents invest in buffers to disruptions. These buffers rise and then fall as the economy produces more complex goods, a prediction consistent with global patterns of input inventories. Large jumps in economic complexity can backfire. This result suggests why "big push" policies can fail, and it underscores the importance of reliability and of gradual increases in technological complexity.Comment: Main text: 10 pages, 6 figures. Supplementary Information: 15 pages, 1 figur

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Cascading Failures in Production Networks

Cited by 161 publications

References 61 publications

The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem

The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten's Theorem

Endogenous Production Networks

Contagious disruptions and complexity traps in economic development

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