The Bullwhip: Time-to-Build and Sectoral Fluctuations

We develop a theory of sectoral fluctuations driven by the propagation of demand shocks along supply chains with heterogeneous time-to-build production. We solve the model in closed form. Downstream producers respond directly to current demand. Upstream producers, due to time-to-build delays, respond to anticipated future demand. Consequently, hump-shaped demand shocks to downstream goods propagate and amplify along the supply chain, generating pronounced volatility in upstream sectors and creating the bullwhip effect. Empirically and quantitatively, we show that the bullwhip is significant across downstream sectors that are important for final consumption.