Production Networks and Firm-level Elasticities of Substitution

This paper provides one of the first estimates of elasticities of substitution across suppliers within the same product. This paper estimates these elasticities using new real-time administrative tax data on firm-to-firm transactions, with product-level prices and quantities, leveraging geographic and temporal variation from India’s Covid-19 lockdowns to derive causal estimates of these elasticities. Suppliers are highly complementary even at this granular level, with an estimated elasticity of 0.55. The paper shows that the quality of institutions, input specificity, inventories, and time horizons explain the low elasticity. These firm-level complementarities amplify the propagation of negative shocks through production networks, and make connected firms important for shock propagation. In policy counterfactuals, the paper shows that given these complementarities, allowing more connected firms to operate in the face of shocks mitigates output declines non-linearly with the size of the productivity shock.

Bibliographic Details

Main Authors:	Fujiy, Brian C., Ghose, Devaki, Khanna, Gaurav
Format:	Working Paper biblioteca
Language:	English en_US
Published:	Washington, DC: World Bank 2024-05-23
Subjects:	PRODUCTION NETWORKS, ELASTICITIES OF SUBSTITUTION, SHOCK PROPAGATION, RESILIENCE, MICROECONOMICS, MACROECONOMICS, TRADE, INDUSTRY, INNOVATION AND INFRASTRUCTURE, SDG 8, SDG 9, DECENT WORK AND ECONOMIC GROWTH,
Online Access:	http://documents.worldbank.org/curated/en/099221305222481417/IDU165af00a1112bd148f61a8701b798b01d483f https://hdl.handle.net/10986/41586
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