Microeconomic Origins of Macroeconomic Tail Risks
The paper studies how the structure of production networks shapes the distribution of aggregate output, with particular attention to large downturns. It shows that even when idiosyncratic shocks are thin-tailed, interconnections can generate fat-tailed, asymmetric aggregate fluctuations in which large recessions are far more likely than large booms. Network features such as dominant suppliers and limited input substitutability amplify the probability of deep contractions.