Production Chains

More advanced technologies demand higher degrees of specialization – and longer chains of production connecting raw inputs to final outputs. Longer production chains are subject to a “weakest link” effect: they are more fragile and more prone to failure. Optimal chain length is determined by the trade-off between the gains to specialization and the higher failure rate associated with longer chain length. There is a kind of reverse “Keynesian multiplier” that magnifies the effect of real shocks. Consequently, more advanced economies should have higher unemployment rates and be more prone to crisis. The implications of the theory both for measurement and government policy are examined. * Department of Economics, Washington University in St. Louis I would like to thank Michele Boldrin, Vasco Carvalho, Carlos Garriga, Christopher Neely, Adrian PeraltaAlva, Yongseok Shin, the Washington University Economic Theory Reading Group, and most especially the Research Seminar at the St. Louis Federal Reserve Bank for helpful comments. NSF grant SES0851315 provided financial assistance.