The Impact of Node Addition and Deletion on Network Production Fluctuations

TL;DR

This paper models how continuous firm entry and exit in production networks influence economic stability and fluctuations, integrating input-output and controllability theories to inform policy decisions.

Contribution

It introduces a probabilistic framework combining Leontief input-output models with controllability theory to analyze network resilience amid node dynamics.

Findings

Node addition and deletion affect production volatility.

Trade-offs exist between network adaptability and stability.

The model provides insights for balancing innovation and stability.

Abstract

Production networks, dynamic systems of firms linked through input-output relationships, transmit microeconomic shocks into macroeconomic fluctuations. While prior studies often assume static networks, real-world economies feature continuous firm entry (node addition) and exit (node deletion). We develop a probabilistic model to analyze how these dynamics affect production volatility and network resilience. Integrating Leontief input-output frameworks with controllability theory. By quantifying fluctuations as expected values under probabilistic node dynamics, we identify trade-offs between adaptability and stability. Methodologically, we unify Kalman rank criteria and minimum input theory, offering policymakers insights to balance innovation-driven entry with safeguards against destabilizing exits.