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Supply Network Formation and Fragility

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  • Elliott, M.
  • Golub, B
  • Leduc, M. V.

Abstract

We model the production of complex goods in a large supply network. Firms source several essential inputs through relationships with other firms. Due to the risk of such supply relationships being idiosyncratically disrupted, firms multisource inputs and invest to make relationships with suppliers stronger. In equilibrium, aggregate production is robust to idiosyncratic disruptions. However, depending on parameters, the supply network may be robust or arbitrarily sensitive to small aggregate shocks that affect the functioning of relationships. We give conditions under which the equilibrium network is driven to a fragile configuration, where arbitrarily small aggregate shocks cause discontinuous losses. We use the model to provide a unified account of a number of stylized facts about complex economies.

Suggested Citation

  • Elliott, M. & Golub, B & Leduc, M. V., 2020. "Supply Network Formation and Fragility," Cambridge Working Papers in Economics 2028, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2028
    Note: mle30
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    2. Kuhn, Moritz & Luo, Jinfeng & Manovskii, Iourii & Qiu, Xincheng, 2023. "Coordinated firm-level work processes and macroeconomic resilience," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 107-127.
    3. Aymeric Vié & Alfredo J. Morales, 2021. "How Connected is Too Connected? Impact of Network Topology on Systemic Risk and Collapse of Complex Economic Systems," Computational Economics, Springer;Society for Computational Economics, vol. 57(4), pages 1327-1351, April.
    4. Raphael Lafrogne-Joussier & Julien Martin & Isabelle Mejean, 2023. "Supply Shocks in Supply Chains: Evidence from the Early Lockdown in China," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(1), pages 170-215, March.
    5. Antonio De Vito & Martin Jacob & Dirk Schindler & Guosong Xu, 2023. "How Do Corporate Tax Hikes Affect Investment Allocation within Multinationals?," CESifo Working Paper Series 10272, CESifo.
    6. Chen, Jun & Elliott, Matthew & Koh, Andrew, 2023. "Capability accumulation and conglomeratization in the information age," Journal of Economic Theory, Elsevier, vol. 210(C).
    7. Crosignani, Matteo & Macchiavelli, Marco & Silva, André F., 2023. "Pirates without borders: The propagation of cyberattacks through firms’ supply chains," Journal of Financial Economics, Elsevier, vol. 147(2), pages 432-448.
    8. Antoine Mandel & Van-Quy Nguyen & Bach Dong-Xuan, 2024. "Strategic formation of production networks," Papers 2401.08929, arXiv.org.
    9. Andrea Titton, 2024. "Endogenous Fragility in Opaque Supply Chains," Papers 2403.16632, arXiv.org.
    10. Jan Weber, Jan Schulz, 2022. "Growing Differently: A Structural Classification for European NUTS-3 Regions," Working Paper Series, Department of Economics, University of Utah 2022_01, University of Utah, Department of Economics.
    11. Cajal-Grossi, Julia & Del Prete, Davide & Macchiavello, Rocco, 2023. "Supply chain disruptions and sourcing strategies," International Journal of Industrial Organization, Elsevier, vol. 90(C).
    12. Ernest Liu & Aleh Tsyvinski, 2021. "Dynamical Structure and Spectral Properties of Input-Output Networks," Working Papers 2021-13, Princeton University. Economics Department..
    13. Kuusi, Tero & Ali-Yrkkö, Jyrki, 2023. "Shock Infections through Global Value Chains," ETLA Working Papers 109, The Research Institute of the Finnish Economy.

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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