Quarterly Journal of Economics Vol. 135 No. 4 2020
Distortions in Production Networks*
Abstract
How does an economy’s production structure determine its macroeconomic response to sectoral distortions? We study a static, multisector framework in which production is organized in an input-output network and production decisions are distorted. Sectoral distortions manifest at the aggregate level via two channels: total factor productivity (TFP) and the labor wedge. We show that near efficiency, distortions have zero first-order effects on TFP and nonzero first-order effects on the labor wedge, and that a sufficient statistic for the latter are the Domar weights. We thereby provide a Hulten-like theorem for the aggregate effects of sectoral distortions. A quantitative application of the model to the 2008–09 financial crisis suggests that the U.S. input-output structure amplified financial distortions by roughly a factor of two during the crisis.
- DOI
- 10.1093/qje/qjaa018
- Volume
- 135
- Issue
- 4
- Pages
- 2187-2253
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref