Supply Network Formtion and Fragility

Matthew Elliott, Benjamin Golub and Matthew Leduc ()
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Matthew Elliott: CAM - University of Cambridge [UK]
Matthew Leduc: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: We model the production of complex goods in a large supply network. Each firm sources several essential inputs through relationships with other firms. Individual supply relationships are at risk of idiosyncratic failure, which threatens to disrupt production. To protect against this, firms multisource inputs and strategically invest to make relationships stronger, trading off the cost of investment against the benefits of increased robustness. We find that equilibrium aggregate production is robust to idiosyncratic disruptions. Nevertheless, there is a regime in which arbitrarily small systemic shocks cause arbitrarily steep drops in output, so that the the supply network is fragile. The endogenous configuration of supply networks provides a new channel for the powerful amplification of shocks.

Date: 2021-09-30
New Economics Papers: this item is included in nep-net
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-03359607v1
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Related works:
Working Paper: Supply Network Formation and Fragility (2023)
Journal Article: Supply Network Formation and Fragility (2022)
Working Paper: Supply Network Formation and Fragility (2022)
Working Paper: Supply Network Formation and Fragility (2022)
Working Paper: Supply Network Formtion and Fragility (2021)
Working Paper: Supply Network Formation and Fragility (2020)
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