Le Xu

Supply Chain Management, Production Networks, and Aggregate Fluctuations

Over the business cycle, firms adjust not only their sales and input expenditures but also the number of suppliers from which they source from. I incorporate this extensive margin into a real business cycle model featuring input-output networks. Using a dataset of supply chain relationships among US firms, I first document that increases in the number of suppliers are correlated with increases in sales, intermediate input expenditures, total factor productivities, and costs of managing suppliers. Based on these facts, I develop a model in which firms trade off the productivity benefit (return to variety) of accessing more varieties with the (fixed) cost of managing these varieties. The extensive margin adjustment introduces a return to scale into production, which interacts with input-output networks and amplifies industry productivity shocks: In my estimated model, the effect of industry productivity shocks on GDP fluctuations is one-fourth larger than in a (conventional) model where the extensive margin is absent.

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