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Supply Chain Resilience: Should Policy Promote International Diversification or Reshoring?

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  • Gene M. Grossman
  • Elhanan Helpman
  • Hugo Lhuillier

Abstract

Little is known about optimal policy in the face of global supply chain disruptions. Should governments promote resilience by subsidizing backup sources of input supply in multiple countries? Should they encourage firms to source from safer domestic suppliers? We address these questions in a model of production with a critical input and exogenous risks of supply disturbances. With constant elasticity of substitution preferences, a subsidy for diversification achieves the constrained social optimum. When the demand elasticity rises with price, private investments in resilience may be socially excessive and the social planner may wish to discourage diversification while favoring sourcing from abroad.

Suggested Citation

  • Gene M. Grossman & Elhanan Helpman & Hugo Lhuillier, 2023. "Supply Chain Resilience: Should Policy Promote International Diversification or Reshoring?," Journal of Political Economy, University of Chicago Press, vol. 131(12), pages 3462-3496.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/725173
    DOI: 10.1086/725173
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