Customer- and supplier-driven externalities
The purpose of this paper is to provide empirical evidence helpful for distinguishing different types of externalities. We pursue this by extending the productionfunction framework of Robert E. Hall (1990) and Caballero and Lyons (1990, 1992) to exploit two key dimensions of the data: disaggregate input-output relationships and differences estimates emphasizing time-series versus cross-sectional aspects of the data. We obtain three main results. First, from the within estimates (using annual data), which emphasize the time-series properties common across sectors, we find a strong reduced-form relationship industry productivity and the activity level (input growth) of customers. In sharp contrast, supplier activity levels are insignificant. The second result derives from between estimates, which emphasize the cross-sectional dimension of the data. Here, we find the opposite is true: there is a strong reduced-form relationship industry productivity and the activity level of suppliers, but no relationship with customer activity levels. We interpret the first two results as suggesting that over shorter horizons the linkage an industry and its customers is pivotal in the transmission of external effects, while in the long run external effects are mostly related to intermediate goods linkages. The third result concerns the transition from short to long run. We find that as the number of periods over which the variables are averaged is incrementally increased from one year toward the full sample period (27 years), the significance of customers versus suppliers smoothly reverses itself. The remainder of the paper is organized in four sections. Section I presents the core model and the econometric methods for disentangling the external effects; Section II describes the data and estimation; Section III presents the main results; and our conclusions are presented in Section IV.
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