Joel Flynn (Yale): Resilience vs. Fragility: Global Properties of Economies with Endogenous Production Networks
Abstract: We study a canonical static production-network economy in which sectors combine labor and intermediate inputs using constant-returns-to-scale technologies and adjust their supplier mix endogenously. First, we show that any such economy can be represented as one in which firms choose among Leontief technologies with heterogeneous productivities. Second, we leverage this to characterize equilibrium prices: the log-price vector is a min-max over pairs of networks of an affine function of log-productivity shocks. Economically, the two operators capture the forces of resilience and fragility: the “min” reflects gains from changing suppliers or technologies when prices move, while the “max” reflects amplification created by rigid input requirements. Third, specifications such as endogenous Cobb-Douglas and task-based technologies impose resilience or fragility, ruling out non-monotone effects of volatility on GDP. Fourth, we generalize Hulten’s theorem to environments with technology switching and non-differentiability. Fifth, we derive upper and lower bounds on the contribution of productivity shocks to GDP volatility. Methodologically, these results provide a tractable global theory of endogenous production networks beyond local approximations and specific functional forms.
Economics
(847) 491-8200
Email