The Conglomerate Network

This paper proposes a network model of the economy in which conglomerate firms transmit idiosyncratic shocks from one industry to another. The strength of inter-industry connections is determined by the conglomerate's share of total industry sales and by the industry's share of the conglomerate's total sales. The empirical results show that industry growth rates comove more strongly within industry pairs that are more closely connected in the conglomerate network. These results hold after controlling for industry-pair and year fixed effects, input-output connections, reverse causality, and in tests that exploit exogenous cross-sectional industry shocks from import tariff changes. Finally, our model also provides a new cross-industry extension for the widely-used Herfindahl index of concentration.