The Epidemiology of Financial Constraints

We use a network regression approach to study the propagation of financial constraints through production networks. We find that supply-chain partners' constraints i) are roughly 73\% as important as a firm's own constraints for explaining investment levels, ii) propagate primarily upstream, and iii) play an important role in supply-chain network formation. To facilitate a causal interpretation, we exploit loan covenant violations in a novel Network Regression Discontinuity Design that allows for spillovers in treatment effects. Our study suggests that the aggregate effects of financial constraints on under-investment are considerably understated in firm-centric (i.e., non-network) settings that ignore spillovers.