Credit chains and bankruptcy propagation in production networks

We present a simple model of a production network in which firms are linked by supplier–customer relationships involving extension of trade–credit. Our aim is to identify the minimal set of mechanisms which reproduce qualitatively the main stylized facts of industrial demography, such as firms’ size distribution, and, at the same time, the correlation, over time and across firms, of output, growth and bankruptcies. The behavior of aggregate variables can be traced back to the direct firm–firm interdependence. In this paper, we assume that the number of firms is constant and the network has a periodic static structure. But the framework allows further extensions to investigate which network structures are more robust against domino effects and, if the network is let to evolve in time, which structures emerge spontaneously, depending on the individual strategies for orders and delivery. r 2007 Elsevier B.V. All rights reserved. JEL classification: E32; D85; L14; L22