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George Nikolakoudis on Input Choice under Uncertainty: The Emergence of Endogenous Supply Chain Risk

Georgios Nikolakoudis
November 21, 2023
12:15 pm - 1:15 pm
Student Research Workshop

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Room 108

Economists often assume that input choices are made concurrently with production, after the resolution of input cost and productivity uncertainty. In this paper, I study how firms make input plans ex-ante, prior to the resolution of uncertainty. I allow firms to manage their input risk through demand schedules, functions that describe how much of an input the firm is willing to purchase at every possible price. I characterize the firm’s optimal demand schedule and show that the ex-post responsiveness of total inputs purchased to realized prices depends on (i) the firm’s input and output market power, and (ii) the firm’s subjective uncertainty about its costs and revenues. In order to understand how demand schedules shape the transmission of macroeconomic shocks, I embed firm demand schedule choice in a general equilibrium model with firm-to-firm linkages. Flat demand schedules (a low responsiveness of inputs to ex-post prices) imply a low pass-through of productivity and demand shocks to aggregate consumption expenditures. The model has implications for the state-dependent propagation of shocks with respect to uncertainty and input market power.