Endogenous Production Networks

Daron Acemoglu; Pablo D. Azar

doi:10.3982/ecta15899

journal article Jan 01, 2020

Endogenous Production Networks

Daron Acemoglu

Pablo D. Azar

Econometrica Vol. 88 No. 1 pp. 33-82 · JSTOR

View at Publisher Save 10.3982/ecta15899

Abstract

We develop a tractable model of endogenous production networks. Each one of a number of products can be produced by combining labor and an endogenous subset of the other products as inputs. Different combinations of inputs generate (prespecified) levels of productivity and various distortions may affect costs and prices. We establish the existence and uniqueness of an equilibrium and provide comparative static results on how prices and endogenous technology/input choices (and thus the production network) respond to changes in parameters. These results show that improvements in technology (or reductions in distortions) spread throughout the economy via input–output linkages and reduce all prices, and under reasonable restrictions on the menu of production technologies, also lead to a denser production network. Using a dynamic version of the model, we establish that the endogenous evolution of the production network could be a powerful force towards sustained economic growth. At the root of this result is the fact that the arrival of a few new products expands the set of technological possibilities of all existing industries by a large amount—that is, if there are
n products, the arrival of one more new product increases the combinations of inputs that each existing product can use from 2

n−1
to 2

n
, thus enabling significantly more pronounced cost reductions from choice of input combinations. These cost reductions then spread to other industries via lower input prices and incentivize them to also adopt additional inputs.

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Metrics

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Citations

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References

Details

Published: Jan 01, 2020
Vol/Issue: 88(1)
Pages: 33-82

Authors

D

Daron Acemoglu

Department of Economics, MIT

P

Pablo D. Azar

Department of Economics, MIT

Funding

Lynde and Harry Bradley Foundation

Cite This Article

Daron Acemoglu, Pablo D. Azar (2020). Endogenous Production Networks. Econometrica, 88(1), 33-82. https://doi.org/10.3982/ecta15899

Endogenous Production Networks

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