# Cascades in Networks and Aggregate Volatility

Daron Acemoglu

**Abstract: **

We provide a general framework for the study of cascade effects
created by interconnections between sectors, firms or financial
institutions. Focusing on a multi-sector economy linked through a
supply network, we show how structural properties of the supply
network determine both whether aggregate volatility disappears as the
number of sectors increases (i.e., whether the law of large numbers
holds) and when it does, the rate at which this happens. Our main
results characterize the relationship between first-order
interconnections (captured by the weighted degree sequence in the
graph induced by the input-output relations) and aggregate volatility,
and more importantly, the relationship between higher-order
interconnections and aggregate volatility. These higher-order
interconnections capture the cascade effects, whereby low productivity
or the failure of a set of suppliers propagates through the rest of
the economy as their downstream sectors/firms also suffer and transmit
the negative shock to their downstream sectors/firms. We also link the
probabilities of tail events (large negative deviations of aggregate
output from its mean) to sector-specific volatility and to the
structural properties of the supply network.

It is a joint work with Alireza Tahbaz-Salehi and Asu Ozdaglar.