Production Networks and War
45 Pages Posted: 18 Jan 2022
Date Written: November 22, 2021
How do severe shocks such as war alter the economy? We study how a country's production network is affected by a devastating but localized conflict. Using unique transaction-level data on Ukrainian railway shipments, we uncover several novel indirect effects of conflict on firms. First, we document substantial propagation effects on interfirm trade --- trade declines even between partners outside the conflict areas if one of them had traded with those areas before the start of the war. The magnitude of such second-degree effect of conflict is one-third of the first-degree effect. Ignoring this propagation would lead to an underestimate of the total impact of conflict on trade by about 67%. Second, war induces sudden changes in the production-network structure that influence firm performance. Specifically, we find that firms that exogenously became more central --- after the conflict practically cut off certain regions from the rest of Ukraine --- received a relative boost to their revenues and profits. Finally, in a production-network model, we separately estimate the effects of the exogenous firm removal and the subsequent endogenous network adjustment on firm revenue distribution. At the median, network adjustment compensates for 80% of the network-destruction effect a year after the conflict onset.
Keywords: Conflict, Trade, Firms, Firm Linkages, Production Networks
JEL Classification: D22, D74, F14, F51, H56
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