“Financial Constraints and Propagation of Shocks in Production Networks” by Professor Beata Smarzynska Javorcik
Beata Smarzynska Javorcik
University of Oxford
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 in the tax rate applying to imports purchased on credit from 3 to 6% in October 2011. As utilization of trade credit varied across product varieties, the shock had a heterogenous effect across importers. The results suggest that the shock was propagated and amplified by firms with limited access to external liquidity. Liquidity constrained importers, exposed to the shock, transmitted it to their liquidity constrained customers.
