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Research Questions

  1. How can systemic risk be measured across the broad economy?
  2. Can firm-level analysis in the U.S. economy help measure the microfoundations of aggregate economic risk?

In the years following the 2008 financial crisis, significant attention was paid to systemic risk within heavily interconnected financial networks. The academic discussions on interbank network structure, market stability, and contagion gave rise to a policy debate about whether major banks had become both too big and too interconnected to fail. However, despite the focus on systemic risk—the risk of market collapse resulting from firm-level risks—within the financial sector, little attention was paid to systemic risks in the economy at large. The authors of this report address that gap in research. To begin to measure the potential magnitude of systemic risk in the broad economy, the authors estimated firm-to-firm connections across sectors of the U.S. economy. Using network analysis on observed firm-level networks to elucidate heavily interconnected firms and areas of centrality (i.e., firms of significant network importance), statistical inference, and network calibration, the authors provide a new approach to modeling the economy at the firm level that expands on the traditional sector-level input-output modeling by estimating firm-level input-output flows. The result allows one to use traditional input-output modeling to estimate the size of potential idiosyncratic shocks and to use economically weighted measures of centrality to reveal systemically important firms. The approach is a contribution to the growing literature on the microfoundations of economic risk, with the potential for use across a wide range of applications from financial stability to natural disasters.

Key Findings

  • A new approach for estimating firm-level production networks using network analysis, statistical inference, and computational economics can better calculate the potential impact of idiosyncratic shocks to firms in diverse economic sectors.
  • There is evidence that systemic risk extends beyond the financial sector to diverse sectors of the economy.
  • Few firms represent the potential for significant aggregate losses. However, of those that do, many extend beyond the traditional sector of systemic concern (i.e., finance).
  • Firms in various sectors are systemically important and vulnerable to shocks, including technology (e.g., Alphabet, Amazon, Apple, Cisco), telecommunications (e.g., AT&T), and health care (e.g., UnitedHealth Group, CVS Health).

Table of Contents

  • Chapter One


  • Chapter Two

    Literature Review

  • Chapter Three

    The Model of Firm-Level Linkages

  • Chapter Four

    Observed Interfirm Production Network

  • Chapter Five

    Estimating Production Networks Through Inference

  • Chapter Six

    Contagion Across Firm Networks

  • Chapter Seven

    Conclusions and Implications

Research conducted by

Funding for this research was provided by gifts from RAND supporters and income from operations. The research was conducted within RAND Education and Labor.

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