Financial Constraints and Propagation of Shocks in Production Networks

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Financial Constraints and Propagation of Shocks in Production Networks

Demir, Banu; Javorcik, Beata; Michalski, Tomasz K.; Ors, Evren

The review of economics and statistics, 03/2024, Volume: 106, Issue: 2

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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.

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Demir, Banu | Javorcik, Beata | Michalski, Tomasz K. | Ors, Evren

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