DP15316 Financial Constraints and Propagation of Shocks in Production Networks

Author(s):	Banu Demir, Beata Javorcik, Tomasz Michalski, Evren Örs
Publication Date:	September 2020
Keyword(s):	Financing constraints, liquidity, production networks, shock transmission
JEL(s):	E23, F14, F61, G23, L14
Programme Areas:	Financial Economics, International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=15316

This study finds that even small unexpected supply shocks propagate downstream through production networks and are amplified by firms with short-term financial constraints. The unexpected 2011 increase in the tax on imports purchased with foreign-sourced trade credit is examined using data capturing almost all Turkish supplier-customer links. The identification strategy exploits the heterogeneous impact of the shock on importers. The results indicate that this small shock had a non-trivial economic impact on exposed firms and propagated downstream through affected suppliers. Empirical tests, motivated by a simple theory, demonstrate that low-liquidity firms amplified its transmission.