Production and financial linkages in inter-firm networks: Structural variety, risk-sharing and resilience

Abstract

The paper analyzes how (production and financial) inter-firm networks can affect firms’ default probabilities and observed default rates. A simple theoretical model of shock transfer is built to investigate some stylized facts on how firmidiosyncratic shocks are allocated in the network, and how this allocation changes firm default probabilities. The model shows that the network works as a perfect "risk-pooling” mechanism, when it is both strongly connected and symmetric. But the "risk-sharing” does not necessarily reduce default rates, unless the shock firms face is lower on average than their financial capacity. Conceived as cases of symmetric inter-firm networks, industrial districts might have a comparative disadvantage in front of heavy crises.