Cascading Failures in Production Networks *

Abstract I show how the extensive margin of firm entry and exit can greatly amplify idiosyncratic shocks in an economy with a production network. I show that input-output models with entry and exit behave very differently to models without this margin. In particular, in such models, sales provide a very poor measure of the systemic importance of firms or industries. I derive a new notion of systemic influence called exit centrality that captures how exits in one industry will affect equilibrium output. I show that exit centrality need not be monotonically related to an industry's sales, size, or prices. Unlike the relevant notions of centrality in standard input-output models, exit centrality depends on the industry's role as both a supplier and as a consumer of inputs. Furthermore, I show that granularities in systemically important industries can cause one failure to snowball into a large-scale avalanche of failures. In this sense, shocks can be amplified as they travel through the network, whereas in standard input-output models they cannot

Different paths to the modern state in Europe: the interaction between domestic political economy and interstate competition

Theoretical work on state formation and capacity has focused mostly on early modern Europe and on the experience of western European states during this period. While a number of European states monopolized domestic tax collection and achieved gains in state capacity during the early modern era, for others revenues stagnated or even declined, and these variations motivated alternative hypotheses for determinants of fiscal and state capacity. In this study we test the basic hypotheses in the existing literature making use of the large date set we have compiled for all of the leading states across the continent. We find strong empirical support for two prevailing threads in the literature, arguing respectively that interstate wars and changes in economic structure towards an urbanized economy had positive fiscal impact. Regarding the main point of contention in the theoretical literature, whether it was representative or authoritarian political regimes that facilitated the gains in fiscal capacity, we do not find conclusive evidence that one performed better than the other. Instead, the empirical evidence we have gathered lends supports to the hypothesis that when under pressure of war, the fiscal performance of representative regimes was better in the more urbanized-commercial economies and the fiscal performance of authoritarian regimes was better in rural-agrarian economie

Cascading Failures in Production Networks *

Abstract I show how the extensive margin of firm entry and exit can greatly amplify idiosyncratic shocks in an economy with a production network. I show that canonical input-output models, which lack the extensive margin of firm entry and exit, have some crucial limitations. In these models, the systemic importance of a firm does not respond to productivity shocks, depends only on the firm's role as a supplier, and is equal to or well-approximated by the firm's size. This means that for every canonical input-output model, there exists a non-interconnected model that has the same aggregate response to productivity shocks. I show that when we allow for entry and exit, the systemic importance of a firm responds endogenously to productivity shocks, depends on a firm's role not just as a supplier but also as a consumer, and a firm's systemic influence is no longer well-approximated by its size. Furthermore, I show that nondivisibilities in systemically important industries can cause one failure to snowball into a large-scale avalanche of failures. In this sense, shocks can be amplified as they travel through the network, whereas in canonical input-output models they cannot

Land, history or modernization? Explaining ethnic fractionalization

Ethnic fractionalization (EF) is frequently used as an explanatory tool in models of economic development, civil war and public goods provision. However, if EF is endogenous to political and economic change, its utility for further research diminishes. This turns out not to be the case. This paper provides the first comprehensive model of EF as a dependent variable. It contributes new data on the founding date of the largest ethnic group in each state. It builds political and international variables into the analysis alongside historical and geoclimatic parameters. It extends previous work by testing models of politically relevant EF. In addition, this research interprets model results in light of competing theories of nationalism and political change. Results show that cross-national variation in EF is largely exogenous to modern politico-economic change. However, the data are inconclusive with respect to competing geoclimatic, historical institutional and modernist theories of ethnogenesis