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Resilience in Vertical Supply Chains

Author

Listed:
  • Gene M. Grossman

    (Princeton University)

  • Elhanan Helpman

    (Harvard University)

  • Alejandro Sabal

    (Princeton University)

Abstract

Forward-looking investments determine the resilience of firms' supply chains. Such investments confer externalities on other firms in the production network. We compare the equilibrium and optimal allocations in a general equilibrium model with an arbitrary number of vertical production tiers. Our model features endogenous investments in resilience, endogenous formation of supply links, and sequential bargaining over quantities and payments between firms in successive tiers. We derive policies that implement the first-best allocation, allowing for subsidies to input purchases, network formation, and investments in resilience. The first-best policies depend only on production function parameters of the pertinent tier. When subsidies to transactions are infeasible, the second-best subsidies for resilience and network formation depend on production function parameters throughout the network, and subsidies are larger upstream than downstream whenever the bargaining weights of buyers are non-increasing along the chain.

Suggested Citation

  • Gene M. Grossman & Elhanan Helpman & Alejandro Sabal, 2023. "Resilience in Vertical Supply Chains," Working Papers 2023-03, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2023-03
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    File URL: https://www.princeton.edu/~grossman/Resilience092323.pdf
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    References listed on IDEAS

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    1. Emmanuel Dhyne & Ayumu Ken Kikkawa & Toshiaki Komatsu & Magne Mogstad & Felix Tintelnot, 2025. "Firm Responses and Wage Effects of Foreign Demand Shocks with Fixed Labor Costs and Monopsony," American Economic Review, American Economic Association, vol. 115(12), pages 4328-4368, December.
    2. Henrick Horn & Asher Wolinsky, 1988. "Bilateral Monopolies and Incentives for Merger," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 408-419, Autumn.
    3. Emmanuel Dhyne & Ayumu Ken Kikkawa & Toshiaki Komatsu & Magne Mogstad & Felix Tintelnot,, 2022. "Foreign demand shocks to production networks: Firm responses and worker impacts," Working Paper Research 412, National Bank of Belgium.
    4. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
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    Citations

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    Cited by:

    1. Massimo Motta & Michele Polo, 2024. "Supply chain disruption and precautionary industrial policy," Economics Working Papers 1895, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Hadachek, Jeffrey & Ma, Meilin, 2024. "Risk Externalities in Vertical Supply Chains," 2024 Annual Meeting, July 28-30, New Orleans, LA 343748, Agricultural and Applied Economics Association.
    3. Michele Polo & Massimo Motta, 2024. "Supply Chain Disruption and Precautionary Industrial Policy," Working Papers 1466, Barcelona School of Economics.
    4. Márta Bisztray & Gábor Békés & Alexandros Charos & Klaus Friesenbichler & Miklós Koren & Agnes Kügler & Balázs Lengyel & Amanda De Pirro & Birgit Meyer, 2025. "The Supply Chain Disruption Survey: A New Survey on Knowledge Flows in Global Supply Chains," WIFO Working Papers 716, WIFO.
    5. Yasuyuki TODO, 2025. "Reconsidering Supply Chains and Industrial Policy from the Economic Security Perspective," Policy Discussion Papers 25005, Research Institute of Economy, Trade and Industry (RIETI).

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    More about this item

    Keywords

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    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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