Firm Volatility in Granular Networks

Abstract

Firm volatilities co-move strongly over time, and their common factor is the dispersion of the economy-wide firm size distribution.In the cross section, smaller firms and firms with a more concentrated customer base display higher volatility.Network effects are essential to explaining the joint evolution of the empirical firm size and firm volatility distributions.We propose and estimate a simple network model of firm volatility in which shocks to customers influence their suppliers.Larger suppliers have more customers and customer-supplier links depend on customers size.The model produces distributions of firm volatility, size, and customer concentration consistent with the data.

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