There is growing evidence that economic events – such as economic policies, bankruptcies, and production disruptions – may create cascading effects in the economy. More surprising is the evidence from the networks literature that even small and firm-specific shocks can propagate and become relevant in the aggregate.

Despite this evidence, we still understand very little about the factors that drive these spill-overs in the economy. If economic agents could easily adjust to these small shocks, then we would not observe the amplification of these shocks through the economy.

I investigate cases of such transmission of shocks and spill-overs in customer supply chains and bank credit portfolios. More importantly, I propose possible mechanisms that prevent agents from fully compensating these shocks. One of them might be the set of laws and institutions that govern the enforcement of debt contracts and business contracts.