Supply Chain Disruptions: Evidence from the Great East Japan Earthquake

Exploiting the exogenous and regional nature of the Great East Japan Earthquake of 2011, this paper provides a systematic quantification of the role of input-output linkages as a mechanism for the propagation and amplification of shocks. We document that the disruption caused by the earthquake and its aftermaths propagated upstream and downstream supply chains, affecting the direct and indirect suppliers and customers of disaster-stricken firms. We then use our empirical findings to obtain an estimate for the overall macroeconomic impact of the shock by taking these propagation effects into account. We find that the propagation of the shock over input-output linkages can account for a 1.2 percentage point decline in Japan's gross output in the year following the earthquake. We interpret these findings in the context of a general equilibrium model that takes the firm-to-firm linkages into account explicitly.