Firm Volatility in Granular Networks
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University of California, Los AngelesYale University, Applied Quantitative Research, and National Bureau of Economic ResearchStanford University and National Bureau of Economic ResearchColumbia University, National Bureau of Economic Research, and Center for Economic Policy Research
Firm volatilities comove strongly over time, and their common factor is the dispersion of the economy-wide firm size distribution. In the cross section, smaller firms and firms with a more concentrated customer base display higher volatility. Network effects are essential to explaining the joint evolution of the empirical firm size and firm volatility distributions. We propose and estimate a simple network model of firm volatility in which shocks to customers influence their suppliers. Larger suppliers have more customers, and customer-supplier links depend on customers’ size. The model produces distributions of firm volatility, size, and customer concentration consistent with the data.
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