Econometric Analysis of Production Networks with Dominant Units

This paper considers production and price networks with unobserved common factors, and derives an exact expression for the rate at which aggregate ‡uctuations vary with the dimension of the network. It introduces the notions of strongly and weakly dominant and non-dominant units, and shows that at most a …nite number of units in the network can be strongly dominant. The pervasiveness of a network is measured by the degree of dominance of the most pervasive unit in the network, and is shown to be equivalent to the inverse of the shape parameter of the power law …tted to the network outdegrees. New cross-section and panel extremum estimators for the degree of dominance of individual units in the network are proposed and their asymptotic properties investigated. Using Monte Carlo techniques, the proposed estimator is shown to have satisfactory small sample properties. An empirical application to US input-output tables spanning the period 1972 to 2007 is provided which suggests that no sector in the US economy is strongly dominant. The most dominant sector turns out to be the wholesale trade with an estimated degree of dominance ranging from 0.72 to 0.82 over the years 1972-2007. Keywords: aggregate ‡uctuations, strongly and weakly dominant units, spatial models, outdegrees, degree of pervasiveness, power law, input-output tables, US economy JEL Classi…cations: C12, C13, C23, C67, E32 We acknowledge helpful comments by Daron Acemoglu, Vasco Carvalho, Ron Smith, Martin Weidner, and participants at the Max King Conference at Monash University, the 2017 Asian Meeting of the Econometric Society, the third Vienna Workshop on High Dimensional Time Series in Macroeconomics and Finance, the fourth annual conference of the International Association for Applied Econometrics (IAAE), and seminar participants at University of Southern California. We would also like to thank Ida Johnsson for help with the compilation of input-output tables. Yang gratefully acknowledges the IAAE travel grant. Corresponding address: Department of Economics, University of Southern California, 3620 South Vermont Avenue, Kaprielian Hall 300, Los Angeles, CA 90089, USA. E-mail addresses: [email protected] (M. Hashem Pesaran), [email protected] (Cynthia Fan Yang).