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

Supply Network Formation and Fragility

CWPE2028

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.

Keywords: network formation, fragility, reliability, robustness

JEL Codes: D85

Author links: Matthew Elliott  

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2028.pdf

Open Access Link: https://doi.org/10.17863/CAM.83976

COVID-19 Economic Research Special Feature: Supply Network Formation and Fragility

Published Version of Paper: Supply Network Formation and Fragility, Elliott, M., Golub, B. and Leduc, M. V. , American Economic Review (2022)

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