Financial Constraints and Propagation of Shocks in Production Networks

"Financial Constraints and Propagation of Shocks in Production Networks" co-authored with Banu Demir, Tomasz Michalski and Evren Ors. Abstract: This study examines the role of financing constraints in propagation of an unexpected supply shock through a country's production network. The analysis, motivated by a simple theoretical model, is based on data covering quasi-totality of supplier-customer links in Turkey during the 2010-14 period. The shock in question was the increase of the tax rate applying to imports purchased on credit from 3% to 6% of the transaction value, which took place in October 2011. As utilization of trade credit varied across product varieties, the shock had a heterogenous e ect across importers. The results suggest that the shock had a substantial direct e ect on importers. More interestingly, the findings suggest that it was propagated and ampli fied primarily by fi rms with limited access to external liquidity. Liquidity constrained importers, exposed to the shock, transmitted it to their customers to a much larger extent than importers that were not facing liquidity constraints.