Working Paper: CEPR ID: DP16759
Authors: Vasily Korovkin; Alexey Makarin
Abstract: 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 around the start of the 2014 Russia-Ukraine crisis, 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 conflict events. The magnitude of such second-degree effect of conflict is one-fifth 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. 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. For a median firm, network adjustment compensates for 80% of the network destruction a year after the conflict onset.
Keywords: conflict; trade; firms; production networks
JEL Codes: D22; D74; F14; F51; H56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Onset of conflict (D74) | Reduction in interfirm trade intensity (F12) |
| Onset of conflict (D74) | Negative effects on firms indirectly connected to conflict areas (F51) |
| Increased centrality post-conflict (D74) | Increase in sales (M31) |
| Network adjustment (D85) | Compensates for revenue decline due to network destruction (D85) |