Customer Concentration and the Upstream Propagation of Idiosyncratic Shocks: Evidence from Labor Strikes
This paper studies the role of customer concentration in the upstream propagation of idiosyncratic firm-level shocks. I utilize major labor strikes as idiosyncratic disruptions of large firms with multiple suppliers. I find that strike-hit customers impose a substantial output loss on their suppliers. The negative effect increases with suppliers’ direct dependence on disrupted customers. Moreover, suppliers’ output loss is amplified by additional indirect links that exist if suppliers sell products to other companies whose business also depends on the large disrupted customer. Overall, these results show that customer concentration increases the vulnerability of production networks to idiosyncratic firm-level shocks.
Labor strikes and sales growth
This figure illustrates regression estimates of quarterly sales growth in the one year before and the one year following a labor strike for both the strike-hit major customers and their suppliers. Sales growth is the growth in sales relative to the same quarter in the previous year. The solid line connects coefficient estimates of sales growth on dummies indicating whether a firm is hit by a labor strike in the subsequent four quarters, the current quarter, and the previous three quarters. It is estimated on the customer sample. The dashed line connects coefficient estimates of sales growth on dummies indicating whether a firm’s major customer is hit by a labor strike in the subsequent four quarters, the current quarter, and the previous three quarters. It is estimated on the supplier sample. Both regressions include firm and year-quarter fixed effects. The sample period spans 1983 to 2013. The quarter of the strike (t0) is highlighted in red. T-statistics presented in parentheses are based on robust standard errors clustered at the firm level. ***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.