Financial Constraints and Propagation of Shocks in Production Networks

Banu Demir; Beata Smarzynska Javorcik; Tomasz Michalski; Evren Örs

doi:10.1162/rest_a_01162

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The Review of Economics and Statistics Vol. 106 No. 2 2024

Financial Constraints and Propagation of Shocks in Production Networks

Banu Demir¹; Beata Smarzynska Javorcik²; Tomasz Michalski³; Evren Örs³

¹ Bilkent University and CEPR · ² University of Oxford and CEPR , · ³ HEC Paris and GREGHEC

Abstract

We examine the propagation of a small unexpected supply shock through a production network and the role financial constraints play in its transmission. Using data on almost all Turkish supplier-customer links, we exploit the heterogeneous impact of an unexpected import-tax increase for identification. We find that this relatively minor shock had a nontrivial economic impact on exposed firms and propagated downstream through affected suppliers. Importantly, we show that low-liquidity firms amplified its transmission.

DOI: 10.1162/rest_a_01162
Volume: 106
Issue: 2
Pages: 437-454
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Financial Constraints and Propagation of Shocks in Production Networks

Abstract

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