Shock Diffusion: Does inter-sectoral network structure matter?
Abstract: This paper introduces the concept of diffusion of shocks in a macroeconomic network consisting of inter-sectoral production linkages. Using sectoral and firm level data, the paper documents two empirical facts. First, sectoral output do not react contemporaneously to shocks in input sectors (it only reacts with a lag). Second, different sectors take different time horizon to respond to shocks to their input sectors. I then incorporate these features in a model of production network to study the contribution of sectoral shocks to aggregate fluctuations. I show that if sectors have different reaction horizons it leads to diffusion of shocks through the network over time which prevents the inter-sectoral linkages to form the feedback loop structure essential to generate aggregate volatility. So, the impact of a given sectoral shock lingers over a longer time period (due to diffusion) but contributes less to the aggregate volatility in any given period. Finally, I use a factor model to estimate the contribution of aggregate vs idiosyncratic sectoral shocks to aggregate fluctuations in US industrial production (IP) data. I find that in the case of a diffusion adjusted network model the contribution of sectoral shocks to aggregate volatility is small and is of the same magnitude as in the case of statistical factor analysis.
Employment in a network of input-output linkages (with Francois de Soyres and Miguel Z. Anton)
Abstract: What is the consequence of a technological improvement in one sector on employment in sectors located downstream in the supply-chain? On the one hand, if material and labor are gross substitutes in the production function, the price decrease for the former tends to reduce labor demand for the latter per unit produced. On the other hand, the upstream positive technological shock also increases the number of unit produced through a decrease in the marginal cost. The net effect on employment simply depends on the ratio between the elasticity of substitution in the production function and the price elasticity of demand. We estimate those parameters at the sector level using detailed French data and show that employment sensitivity of sectors following a decrease in their material input price are very heterogeneous. Consequences for forecasting the effect of an increase in machine efficiency are discussed.
Gains from Agricultural Market Integration: Role and Size of Intermediaries
Abstract: How does market structure and presence of intermediaries impact the cropping pattern and agricultural trade within a country? The difference between farm-gate and consumer prices points towards the presence of large margins charged by the intermediaries but it is difficult to isolate the effect of market structure from other phenomenon. This paper exploits a pro-competitive policy reform from India, which allowed free entry of intermediaries in the agricultural markets, to quantify the size of these margins. I develop a Ricardian style comparative advantage model of intra-national trade in agricultural crops, which embeds intermediaries and is suitable to study market structure change. The model gives a structural equation that allows me to estimate the change in intermediary margin due to this reform. I find that post reform the intermediary margin decreased by 16% for Groundnut, one of the major crops in this region. I then connect the model with rich micro datasets on farm productivity and land use to estimate relevant parameters to run counter-factual experiments which reveal that the reform increased average welfare by 1.3%.
Price deficiency payments mechanism: Evidence from the Indian agricultural market (with Abhinav Narayanan)
What is the optimal policy for supporting farm income? This papers looks at the transmission mechanism of Price Deficiency Payments (PDP) scheme into prices and market outcomes for agricultural crops. We leverage a policy change in Madhya Pradesh, India which implemented a PDP scheme (Bhavantar Bhugtan Yojana) during 2017 for eight crops. Among the major crops covered, we find that the policy decreased Urad prices by 5% in Madhya Pradesh and increased its quantity arrivals by 30%, but had no impact on Soyabean. To explain these results, we build a model and show that under PDP, reservation price of farmers goes down which can eventually lead to a supply glut in the market. Our model provides a new mechanism under which PDP can suppress prices, without any presence of collusion or excess production. The crop-wise heterogeneity in terms of past price trends, price volatility and MSP play a major role in explaining why PDP scheme causes supply glut only in the case of some crops and not others.
Household Finance in Developing Countries (with Pawan Gopalakrishnan and S. K. Ritadhi)
We use a novel panel data on Indian households to document the household asset portfolio choice along the extensive margin. While households hold high stocks of gold and real estate, a majority of them participate exclusively in financial assets on a regular basis. This dilutes the puzzle on why households in developing countries hold excessive physical assets. We show that a portfolio choice model, a la Grossman and Laroque (1990), where households face an adjustment cost to change their asset holdings, can explain the mismatch observed in the stocks and flows data. Using regional weather shocks as a source of exogenous variation to household incomes, we show that consecutive positive shocks increases household participation in physical assets while a single positive weather shock increases household participation in financial assets, suggesting that households use financial assets as a transitory asset class, thus providing a direct causal evidence for adjustment costs. Furthermore, we show that increasing access to formal financial institutions increases household participation in physical assets by reducing the adjustment costs.
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