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Networks and Economic Fragility

Author

Listed:
  • Benjamin Golub

    (Department of Economics, Northwestern University, Evanston, Illinois, USA)

  • Matthew Elliott

    (Faculty of Economics, University of Cambridge, Cambridge, United Kingdom)

Abstract

Many firms, banks, or other economic agents embedded in a network of codependencies may experience a contemporaneous, sharp drop in functionality or productivity following a shock—even if that shock is localized or moderate in magnitude. We offer an extended review of motivating evidence that such fragility is a live concern in supply networks and in financial systems. We then discuss network models of fragility, focusing on the forces that make aggregate functionality especially sensitive to the economic environment. The key structural features of networks that determine their fragility are reviewed, with an emphasis on the importance of phase transitions. We then turn to endogenous decisions, both by market participants (e.g., firms investing in network formation and robustness) and by planners (e.g., authorities undertaking macroprudential regulation). Fragility has some distinctive implications for such decisions.

Suggested Citation

  • Benjamin Golub & Matthew Elliott, 2022. "Networks and Economic Fragility," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 665-696, August.
    • Handle: RePEc:anr:reveco:v:14:y:2022:p:665-696
    DOI: 10.1146/annurev-economics-051520-021647
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    Citations

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    Cited by:

    1. Ketelaars, Martijn, 2024. "On the Compatibility of Composition Axioms in Financial Networks," Other publications TiSEM 041e8388-cc78-4d6b-b6ba-5, Tilburg University, School of Economics and Management.
    2. Baldwin, Richard & Freeman, Rebecca & Theodorakopoulos, Angelos, 2023. "Hidden exposure: measuring US supply chain reliance," Bank of England working papers 1052, Bank of England.
    3. Ketelaars, Martijn, 2024. "On the Compatibility of Composition Axioms in Financial Networks," Discussion Paper 2024-007, Tilburg University, Center for Economic Research.
    4. Larissa M. Batrancea & Mehmet Ali Balcı & Ömer Akgüller & Lucian Gaban, 2022. "What Drives Economic Growth across European Countries? A Multimodal Approach," Mathematics, MDPI, vol. 10(19), pages 1-20, October.

    More about this item

    Keywords

    supply chains; production networks; supply disruptions; networks; fragility; robustness;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production

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