Abstract
Buyer–seller relationships among firms can be regarded as a longitudinal network in which the connectivity pattern evolves as each firm receives productivity shocks. Based on a data set describing the evolution of buyer–seller links among 55,608 firms over a decade and structural equation modeling, we find some evidence that interfirm networks evolve reflecting a firm’s local decisions to mitigate adverse effects from neighbor firms through interfirm linkage, while enjoying positive effects from them. As a result, link renewal tends to have a positive impact on the growth rates of firms. We also investigate the role of networks in aggregate fluctuations.
Highlights
It is important to stress the fact that previous research, in macroeconomics as listed above, has implicitly assumed a static link structure where link renewal does not take place
In order to answer the question concerning the trade-off between propagation of shocks and link renewal in the interfirm buyer–seller network, we provided an empirical analysis on the effect of link renewal on the overall growth rate of an economy
By means of counterfactual analysis, we first showed that the current network is often the best network configuration which optimizes both the propagation of positive shocks and avoidance of negative shocks compared with previous networks, perhaps reflecting each firms motivation to avoid other’s negative shocks and share other’s positive shocks
Summary
The network and financial data used in this paper are from the Teikoku Data Bank. These data are based on questionnaires completed by more than 100,000 firms in Japan for the accounting years 2003 to 2012. We use subscripts to indicate time points, so the buyer network for accounting year 2012 is denoted by G2012 We could combine these two adjacency matrices and create matrices such that H = GT holds using interpolation of links. It can be seen that for all years, the network tends to form links between nodes experiencing a positive log growth rate (and vice versa). This provides our first insight into the connection between the log growth rate of firms and the link renewal process of the network. The difference is that while Foerster, Sarte and Watson (2011) and Malysheva and Sarte (2011) focus on sectorial linkages, we focus more on micro connections in interfirm networks
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