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.