Are Supply Networks Efficiently Resilient?

Agostino Capponi (), Chuan Du and Joseph Stiglitz
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Chuan Du: https://www.federalreserve.gov/econres/chuan-du.htm

No 2024-031, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We show that supply networks are inefficiently, and insufficiently, resilient. Upstream firms can expand their production capacity to hedge againstsupply and demand shocks. But the social benefits of such investments arenot internalized due to market power and market incompleteness. Upstreamfirms under-invest in capacity and resilience, passing-on the costs to downstreamfirms, and drive trade excessively towards the spot markets. There isa wedge between the market solution and a constrained optimal benchmark,which persists even without rare and large shocks. Policies designed to incentivize capacity investment, reduce reliance on spot markets, and enhancecompetition ameliorate the externality.

Keywords: Resilience; Capacity; Monopolistic competition; Supply network; Production (search for similar items in EconPapers)
JEL-codes: D21 D24 D25 D43 D85 E23 L13 (search for similar items in EconPapers)
Pages: 61 p.
Date: 2024-05-28
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Citations: View citations in EconPapers (1)

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Working Paper: Are Supply Networks Efficiently Resilient? (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-31

DOI: 10.17016/FEDS.2024.031

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