In modern economies the production of goods and services is premised on an intricately linked web of specialized production units, each relying on the orderly flow of inputs from their suppliers to produce their own output, which in turn is routed towards other downstream units.

This view of production as a complex interconnected system provides a link between traditional economic analysis at the micro and macro levels. Important systemic forces are often missed by traditional microeconomic approaches, while the aggregate implications of strategic decision making that is captured by this approach demands attention. Focusing on the relationships, particularly supply relationships, between producers facilitates the incorporation of important strategic effects into macroeconomic models, while simultaneously enabling an analysis of aggregate outcomes via a system-wide perspective.

Recent events have emphasized the value that such a perspective can bring. Understanding the supply disruptions of recent times and anticipating future ones necessitates a focus on how disruptions propagate between firms. Similarly, the de-globalization of world trade can be viewed as a rewiring of the production network with subsequent implications for robustness.

The main goals of this project are the following:

• What effect can globalization be expected to have on the fragility of the global economy? Which shocks is the global production network most sensitive to? How does this differ in the long-run versus the short-run?
  These are all important questions in the context of current pressures to de-globalize world trade.

• When do firms’ positions in supply networks confer market power on them?
  When firms embedded in supply networks seek to increase their prices, their customers can look for alternatives. But the ability to source elsewhere will depend on the capacities of alternative suppliers, their ability to source the inputs they need to ramp up production and so on. A systems wide approach can help capture these re-routing possibilities and identify firms that have market power using just data on firm-to-firm transactions.

• Where are the weak points in supply networks? What idiosyncratic firm-specific shocks could have an impact on GDP in the medium run?
  A shock to a firm can impact others in the supply network. Suppliers upstream can be affected by reduced demand while customers downstream may not be able to source all the inputs they need to meet demand. Indeed, some production will be re-routed through the supply network and the structure of the supply network will affect the extent to which this is possible. Understanding this is much like understanding when firms’ positions in the supply network confer market power on them.

• What effects might globalization have on innovation via the structure of trade networks?
  Taking a recombinant approach to innovation (Weitzman, 1998), innovation opportunities come from being able to combine ideas and inputs. On the other hand globalization creates economic pressure for specialization. Does this mean globalization can be bad for innovation? If so, when?

This work builds on a literature demonstrating the importance of modelling production networks for macroeconomic outcomes (Elliott et al., 2022; Bigio and La’O, 2016; Grassi, 2017; Tintelnot et al., 2018; Grassi and Sauvagnat, 2019; Kikkawa et al., 2019; Acemoglu et al., 2019; Baqaee and Farhi, 2019; Liu, 2019). This literature has shown both theoretically and empirically the importance of network structure to the propagation of micro-economic shocks and has provided justification for policy intervention.