Supply Network Formation 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. A supply network is called fragile if aggregate output is very sensitive to small aggregate shocks. We show that supply networks of intermediate productivity are fragile in equilibrium, even though this is always inefficient. The endogenous configuration of supply networks provides a new channel for the powerful amplification of shocks.

Date: 2022-08
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Citations: View citations in EconPapers (4)

Published in American Economic Review, 2022, 112 (8), pp.2701-2747. ⟨10.1257/aer.20210220⟩

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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 Formtion and Fragility (2021)
Working Paper: Supply Network Formtion and Fragility (2021)
Working Paper: Supply Network Formation and Fragility (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-03758414

DOI: 10.1257/aer.20210220

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