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Carvalho, V. M. and Voigtländer, N.

Input Diffusion and the Evolution of Production Networks

WP Number: 1507

Abstract: The adoption and diffusion of inputs in the production network is at the heart of technological progress. What determines which inputs are initially considered and eventually adopted by innovators? We examine the evolution of input linkages from a network perspective, starting from a stylized model of network formation. Producers direct their search for new inputs along vertical linkages, screening the network neighborhood of existing suppliers to identify potentially useful inputs. A subset of these is then adopted, following a tradeoff between the benefits from input variety and the costs of customizing new inputs. Guided by this framework, we document a novel stylized fact at both the sector and the firm level: producers are more likely to adopt inputs that are already used - directly or indirectly - by their current suppliers. In particular, using disaggregated input-output data, we show that initial network proximity of a sector in 1967 significantly increases the likelihood of adoption throughout the subsequent four decades. A one-standard deviation decrease in network distance is associated with an increase in the adoption probability by one third to one half. Similarly, U.S. firms are significantly more likely to develop new input linkages among their suppliers' network neighborhood. Our results imply that the existing production network plays a crucial role in the diffusion of inputs and the evolution of technology.

Keywords: Input adoption, directed network search, dynamics of production networks

JEL Codes: O33 C67 D57 L23

Author links: Vasco Carvalho  

PDF: wp1507.pdf

Open Access Link: 10.17863/CAM.5772

Theme: transmission