Resilience in Vertical Supply Chains

Gene Grossman, Elhanan Helpman and Alejandro Sabal
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Gene Grossman: Princeton University
Elhanan Helpman: Harvard University
Alejandro Sabal: Princeton University

Working Papers from Princeton University. Economics Department.

Abstract: Forward-looking investments determine the resilience of firms' supply chains. Such investments confer externalities on other firms in the production network. We compare the equilibrium and optimal allocations in a general equilibrium model with an arbitrary number of vertical production tiers. Our model features endogenous investments in resilience, endogenous formation of supply links, and sequential bargaining over quantities and payments between firms in successive tiers. We derive policies that implement the first-best allocation, allowing for subsidies to input purchases, network formation, and investments in resilience. The first-best policies depend only on production function parameters of the pertinent tier. When subsidies to transactions are infeasible, the second-best subsidies for resilience and network formation depend on production function parameters throughout the network, and subsidies are larger upstream than downstream whenever the bargaining weights of buyers are non-increasing along the chain.

Keywords: Firms; Resilience; Vertical Supply Chains (search for similar items in EconPapers)
JEL-codes: D21 D62 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-com, nep-inv, nep-mic, nep-net and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2023-03

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