Input Diffusion and the Evolution of Production Networks
Tuesday 10th March 2015
CINET:
1507
Carvalho, V. M. and Voigtländer, N.
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
O33
C67
D57
L23
Themes
transmission