the most connected firms are affected compared to the least connected or a random set of firms. The importance of the most connected firms increases non-linearly with the size of the negative productivity shock and decreases as firms become more substitutable. Finally, we quantify how important it is to also consider a firm’s indirect connectivity and find that under our elasticity and a negative productivity shock of 25%, the fall in GDP would be 2 _._ 56 _pp_ less if the most connected firms were allowed to operate during the lockdowns compared to only allowing the directly connected firms (counting only the number of direct buyers) to operate.<sup>8</sup> We see that as the shock gets larger, the difference in aggregate GDP between these two experiments rises, emphasizing the importance of measuring a firm’s indirect connections as well.

**Related Work.** Our paper contributes to two strands of the literature. First, we contribute to the literature on shock propagation and amplification through supply chains and production networks (Barrot and Sauvagnat, 2018; Carvalho et al., 2021; Peter and Ruane, 2022; Boehm et al., 2019; Korovkin and Makarin, 2020; Ferrari, 2022; Dew-Becker, 2023; Huneeus, 2018; Arkolakis et al., 2023).<sup>9</sup> A crucial parameter determining the degree of shock propagation through supply chains is the firm-level elasticity of substitution across suppliers within the same product category. Existing work has estimated firm-level elasticities of substitution between product categories or between domestic and foreign industries (Peter and Ruane, 2022; Carvalho et al., 2021; Boehm et al., 2019; Atalay, 2017). The challenge highlighted by this literature in estimating the elasticity across suppliers within a product category lies in the fact that most firm-to-firm datasets do not contain product-level (unit) prices from each supplying firm to a buying firm, or lack the required variation in such prices to estimate these elasticities.<sup>10</sup> The lack of firm-level elasticities across suppliers has so far constrained our assessment of the importance of nodal firms, such as the most connected firms, in the propagation of shocks through production networks.

We contribute to the literature in each of these dimensions. First, we measure unit values (prices) and quantities at the transaction (seller-buyer-product-time) level. We derive price changes from supply and transportation disruptions in lockdown-affected districts and estimate the firm-level elasticity of substitution between suppliers within a product category. We then quantify how this elasticity amplifies firm-specific supply shocks through a roundabout production network

> 8A firm’s indirect connections measure not only the number of direct buyers of a supplier but also the buyers’ buyers and their buyers, and so on.

> 9See Bernard and Moxnes (2018) and Carvalho and Tahbaz-Salehi (2019) for a comprehensive literature review. 10Carvalho et al. (2021) observe a binary measure of whether firms were connected via buyer-supplier relationships rather than quantities and unit values associated with such transactions. They use a proportionality assumption, which precludes estimating the elasticity of substitution across suppliers within a product category, as a buyer sourcing from two suppliers in the same industry will source the same amount given the assumption. Although lacking firm-to-firm price data, Dhyne et al. (2022) structurally estimate a similar elasticity in the context of imperfect competition models where they restrict the elasticity to be larger than 1 for mark-ups to be relevant.

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