1/ I’m on the job market this year, thus an excuse to send out some key ideas about my JMP. First time I do this, so let’s see how it works.
2/ Firms form relationships with other firms to purchase inputs and sell their products. Forming these links in intermediate input markets is important. They imply dependencies between firms and thus a source for the propagation of shocks.
3/ Forming these links is also difficult. One of firms’ top concerns are supply-chain disruptions, which suggests that adjusting firms’ supply-chain relationships is costly.
4/ There is a lot of evidence of how adjustment costs in other margins of firms’ decisions influence the propagation of shocks. Adjustment costs that characterize firm-to-firm links have, until now, not been evaluated.
5/ My JMP evaluates quantitatively how shocks propagate through production networks when links between firms are costly to adjust. I find that without those adjustment costs, the trade shocks from the Great Recession would have negatively impacted Chile by a third less.
6/ To implement the paper, I use a new and rich firm transaction dataset of a developing economy, documented new facts about production links’ dynamics and estimated a general equilibrium model of production network dynamics.
7/ Solving for the dynamics in those networks is challenging. Had to develop an algorithm to implement this at a quantitative scale.
8/ Going forward, any analysis of the propagation of shocks that aims to be quantitatively accurate should take these dynamics into account.
9/ In particular, given the context of increasing reliance on global value chains, this paper says that the costs of forming relationships in those networks are fundamental when studying how shocks propagate.
10/ Our world is increasingly connected, producing benefits but also challenges. My model predicts that negative shocks are amplified, positive shocks are dampened. Ignoring the costs of forming links between firms will prevent us from taking full advantage of this connectivity.
11/ The framework can be used to study a variety of questions. For example, how will Trump's tariff propagate through the world economy once we take into account that adjusting relationships in global value chains is costly?
12/ Another application. Firms make inefficient decisions when forming links with other firms because they ignore the network externality on other firms. Measuring these externalities can be useful for designing stabilization policies in intermediate input markets.
13/ For this, and more, fedehuneeus.com.
