Supply Network Formation and Fragility

52 Pages Posted: 23 Feb 2020 Last revised: 19 Feb 2021

See all articles by Matthew Elliott

Matthew Elliott

Cambridge University

Benjamin Golub

Northwestern University

Matthew V. Leduc

Paris School of Economics (PSE) / Université Paris 1

Date Written: February 23, 2020

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. We find that equilibrium aggregate production is robust to idiosyncratic disruptions. Nevertheless, there is a regime in which arbitrarily small systemic shocks cause arbitrarily steep drops in output, so that the the supply network is fragile. The endogenous configuration of supply networks provides a new channel for the powerful amplification of shocks.

Keywords: network formation, fragility, reliability, robustness

JEL Classification: D85

Suggested Citation

Elliott, Matthew and Golub, Benjamin and Leduc, Matthew V., Supply Network Formation and Fragility (February 23, 2020). Available at SSRN: https://ssrn.com/abstract=3525459 or http://dx.doi.org/10.2139/ssrn.3525459

Matthew Elliott

Cambridge University ( email )

Faculty of Economics
Austin Robinson Building Sidgwick Avenue
Cambridge, CB39DD
United Kingdom

Benjamin Golub (Contact Author)

Northwestern University ( email )

Evanston, IL 60201
United States

Matthew V. Leduc

Paris School of Economics (PSE) / Université Paris 1 ( email )

48 boulevard Jourdan
Paris, 75014
France

HOME PAGE: http://sites.google.com/site/mattvleduc/

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