IDEAS home Printed from https://ideas.repec.org/p/cam/camdae/2028.html
   My bibliography  Save this paper

Supply Network Formation and Fragility

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2028.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Daron Acemoglu & Pablo D. Azar, 2020. "Endogenous Production Networks," Econometrica, Econometric Society, vol. 88(1), pages 33-82, January.
    2. Vasco M Carvalho & Makoto Nirei & Yukiko U Saito & Alireza Tahbaz-Salehi, 2021. "Supply Chain Disruptions: Evidence from the Great East Japan Earthquake," The Quarterly Journal of Economics, Oxford University Press, vol. 136(2), pages 1255-1321.
    3. Antonio Cabrales & Piero Gottardi & Fernando Vega-Redondo, 2017. "Risk Sharing and Contagion in Networks," Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 3086-3127.
    4. Johannes Boehm & Ezra Oberfield, 2020. "Misallocation in the Market for Inputs: Enforcement and the Organization of Production," The Quarterly Journal of Economics, Oxford University Press, vol. 135(4), pages 2007-2058.
    5. Vasco M. Carvalho, 2014. "From Micro to Macro via Production Networks," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 23-48, Fall.
    6. Matthew O. Jackson & Tomas Rodriguez-Barraquer & Xu Tan, 2012. "Social Capital and Social Quilts: Network Patterns of Favor Exchange," American Economic Review, American Economic Association, vol. 102(5), pages 1857-1897, August.
    7. Ezra Oberfield, 2014. "Misallocation in the Market for Inputs," 2014 Meeting Papers 1226, Society for Economic Dynamics.
    8. Eduard Talamàs & Rakesh Vohra, 2018. "Go Big or Go Home: A Free and Perfectly Safe but Only Partially Effective Vaccine Can Make Everyone Worse Off," PIER Working Paper Archive 18-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 15 Jan 2018.
    9. Hall, Robert E., 1979. "A theory of the natural unemployment rate and the duration of employment," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 153-169, April.
    10. Vasco M. Carvalho, 2014. "From Micro to Macro via Production Networks," Working Papers 793, Barcelona Graduate School of Economics.
    11. Mathieu Taschereau-Dumouchel, 2017. "Cascades and Fluctuations in an Economy with an Endogenous Production Network," 2017 Meeting Papers 700, Society for Economic Dynamics.
    12. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, vol. 91(3), pages 485-508, June.
    13. Bernstein, Lisa, 1992. "Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry," The Journal of Legal Studies, University of Chicago Press, vol. 21(1), pages 115-157, January.
    14. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
    15. Jonathan Murdoch & Terry Marsden & Jo Banks, 2000. "Quality, Nature, and Embeddedness: Some Theoretical Considerations in the Context of the Food Sector," Economic Geography, Taylor & Francis Journals, vol. 76(2), pages 107-125, April.
    16. Petersen, Mitchell A & Rajan, Raghuram G, 1994. "The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dong, Feng & Wen, Yi, 2019. "Long and Plosser meet Bewley and Lucas," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 70-92.
    2. Basile Grassi & Julien Sauvagnat, 2019. "Production networks and economic policy," Oxford Review of Economic Policy, Oxford University Press, vol. 35(4), pages 638-677.
    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. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Networks, Shocks, and Systemic Risk," NBER Working Papers 20931, National Bureau of Economic Research, Inc.
    5. Frohm, Erik & Gunnella, Vanessa, 2017. "Sectoral interlinkages in global value chains: spillovers and network effects," Working Paper Series 2064, European Central Bank.
    6. Goyal, S., 2016. "Networks and Markets," Cambridge Working Papers in Economics 1652, Faculty of Economics, University of Cambridge.
    7. Lo Turco, Alessia & Maggioni, Daniela & Zazzaro, Alberto, 2019. "Financial dependence and growth: The role of input-output linkages," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 308-328.
    8. Vasco M. Carvalho & Alireza Tahbaz-Salehi, 2019. "Production Networks: A Primer," Annual Review of Economics, Annual Reviews, vol. 11(1), pages 635-663, August.
    9. Huremovic, Kenan & Jiménez, Gabriel & Moral-Benito, Enrique & Vega-Redondo, Fernando & Peydró, José-Luis, 2020. "Production and financial networks in interplay: Crisis evidence from supplier-customer and credit registers," EconStor Preprints 222281, ZBW - Leibniz Information Centre for Economics.
    10. Mandel, Antoine & Taghawi-Nejad, Davoud & Veetil, Vipin P., 2019. "The price effects of monetary shocks in a network economy," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 300-316.
    11. Lorenzo Burlon, 2015. "Ownership networks and aggregate volatility," Temi di discussione (Economic working papers) 1004, Bank of Italy, Economic Research and International Relations Area.
    12. Mundt, Philipp, 2021. "The formation of input–output architecture: Evidence from the European Union," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 89-104.
    13. Ernesto Pasten & Raphael S. Schoenle & Michael Weber & Michael Weber, 2017. "Price Rigidities and the Granular Origins of Aggregate Fluctuations," CESifo Working Paper Series 6619, CESifo.
    14. Goya, Daniel, 2021. "The network effect of Chinese competition on what domestic suppliers produce," Economic Modelling, Elsevier, vol. 102(C).
    15. Längle, Katharina & Xu, Ankai & Tian, Ruijie, 2021. "Assessing the supply chain effect of natural disasters: Evidence from Chinese manufacturers," WTO Staff Working Papers ERSD-2021-13, World Trade Organization (WTO), Economic Research and Statistics Division.
    16. Glenn Magerman & Karolien De Bruyne & Emmanuel Dhyne & Jan Van Hove, 2016. "Heterogeneous Firms and the Micro Origins of Aggregate Fluctuations," Working Papers ECARES ECARES 2016-35, ULB -- Universite Libre de Bruxelles.
    17. Branger, Nicole & Konermann, Patrick & Meinerding, Christoph & Schlag, Christian, 2018. "Equilibrium asset pricing in directed networks," Discussion Papers 37/2018, Deutsche Bundesbank.
    18. Michael Weber & Ali Ozdagli, 2016. "Monetary Policy Through Production Networks: Evidence from the Stock Market," 2016 Meeting Papers 148, Society for Economic Dynamics.
    19. Brancaccio, Emiliano & Giammetti, Raffaele & Lopreite, Milena & Puliga, Michelangelo, 2019. "Monetary policy, crisis and capital centralization in corporate ownership and control networks: A B-Var analysis," Structural Change and Economic Dynamics, Elsevier, vol. 51(C), pages 55-66.
    20. Magalhães, Manuela & Afonso, Óscar, 2017. "A multi-sector growth model with technology diffusion and networks," Research Policy, Elsevier, vol. 46(7), pages 1340-1359.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cam:camdae:2028. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://www.econ.cam.ac.uk/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jake Dyer (email available below). General contact details of provider: https://www.econ.cam.ac.uk/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.