Supply Chain Resilience: Should Policy Promote Diversification or Reshoring?

Gene Grossman, Elhanan Helpman and Hugo Lhuillier

No 16588, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Supply chain disruptions, which have become commonplace, are often associated with globalization and trade. Little is known about optimal policy in the face of insecure supply chains. Should governments promote resilience by subsidizing backup sources of input supply? Should they encourage firms to source from closer and presumably safer domestic suppliers? We address these questions in a very simple model of production with a single critical input and with exogenous risks of relationship-specific and country-wide supply disturbances. We follow Matsuyama and Ushchev (2020) in positing a class of preferences that are homothetic with a single aggregator and that obey Marshall's Second Law of Demand. The familiar case of CES preferences is a member of the class, but it imposes restrictions that are important for policy conclusions.We find that, in the CES case, a subsidy for diversification achieves the constrained social optimum and dominates a policy that promotes reshoring or offshoring. When the demand elasticity rises with price, two policy instruments generally are needed to achieve efficient supply chains, private investments in resilience may be socially excessive, and policy that alter incentives to invest at home versus abroad may achieve greater welfare than ones that encourage or discourage diversification.

Keywords: Global supply chains; Global value chains; Input sourcing; Resilience (search for similar items in EconPapers)
JEL-codes: F12 F13 H21 (search for similar items in EconPapers)
Date: 2021-09
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP16588 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Supply Chain Resilience: Should Policy Promote Diversification or Reshoring? (2021)
Working Paper: Supply Chain Resilience: Should Policy Promote Diversification or Reshoring? (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:16588

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP16588

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().