Supply Network Formation and Fragility
- (pp. 2701-47)
Abstract
We model the production of complex goods in a large supply network. Each firm sources several essential inputs through relationships with other firms. Individual supply relationships are at risk of idiosyncratic failure, which threatens to disrupt production. To protect against this, firms multisource inputs and strategically invest to make relationships stronger, trading off the cost of investment against the benefits of increased robustness. A supply network is called fragile if aggregate output is very sensitive to small aggregate shocks. We show that supply networks of intermediate productivity are fragile in equilibrium, even though this is always inefficient. The endogenous configuration of supply networks provides a new channel for the powerful amplification of shocks.Citation
Elliott, Matthew, Benjamin Golub, and Matthew V. Leduc. 2022. "Supply Network Formation and Fragility." American Economic Review, 112 (8): 2701-47. DOI: 10.1257/aer.20210220Additional Materials
JEL Classification
- D21 Firm Behavior: Theory
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- L14 Transactional Relationships; Contracts and Reputation; Networks