
Elliott, M., Golub, B. and Leduc, M. V.
Supply Network Formation and Fragility
American Economic Review
Vol. 112 no. 8 pp. 2701-2747 (2022)
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: fragility, network formation, reliability, robustness
JEL Codes: D85
Author links: Matthew Elliott
Publisher's Link: https://dx.doi.org/10.1257/aer.20210220
COVID-19 Economic Research Special Feature: Supply Network Formation and Fragility
Cambridge Working Paper in Economics Version of Paper: Supply Network Formation and Fragility, Elliott, M., Golub, B. and Leduc, M. V. , (2020)