Financially Constrained Business Fluctuations in an Evolving Network Economy

We explore the properties of a credit network characterized by inside credit, i.e. credit relationships connecting downstream (DS) and upstream (US) firms, and outside credit, i.e. credit relationships connecting firms and banks. The structure of the network changes over time due to the preferred-partner choice rule. The net worth of DS firms turns out to be the driver of growth and fluctuations. US production, in fact, is determined by demand of intermediate inputs on the part of DS firms. The output of simulations shows that a business cycle at the macroeconomic level can develop as a consequence of the complex interaction of the heterogeneous financial conditions of the agents involved. In this context we can study the emergence of bankruptcy chains. We can also reproduce the main facts of firms’ demography: power law distribution of firms’ size and Laplace ditribution of growth rates.