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Negative default dependence in supplier networks

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Author Info

  • Wagner, Stephan M.
  • Bode, Christoph
  • Koziol, Philipp

Abstract

The financial defaults of suppliers in a supplier network are significant risks and causes of uncertainty for buying firms. Hitherto, it has been largely neglected that default probabilities of suppliers in supplier networks are not independent of each other. We aim to overcome this shortcoming by studying negative supplier default dependencies: situations where a surviving supplier may benefit from the default of another supplier, resulting in a lower default probability. We use empirical data from the automotive supplier industry and copula functions, a method of representing joint distribution functions with particular marginals, to capture the default dependency between automotive suppliers and simulate various scenarios with negative default dependency. We also conduct a comparative static analysis illustrating the significant impact of negative default dependence. Our findings should spur managers to analyze their supplier networks with respect to default dependencies, and to take this phenomenon into consideration when making sourcing decisions.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Production Economics.

Volume (Year): 134 (2011)
Issue (Month): 2 (December)
Pages: 398-406

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Handle: RePEc:eee:proeco:v:134:y:2011:i:2:p:398-406

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Web page: http://www.elsevier.com/locate/ijpe

Related research

Keywords: Supplier default Supplier network Default dependence Negative default correlation Copula function Dependence measure Monte Carlo simulation;

References

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