Supply Network Formation and Fragility
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Authors
Elliott, M.
Golub, B.
Leduc, M. V.
Publication Date
2020-03-11Series
Cambridge Working Papers in Economics
Cambridge-INET Working Paper Series
Publisher
Faculty of Economics, University of Cambridge
Type
Working Paper
Previous Version(s)
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Elliott, M., Golub, B., & Leduc, M. V. (2020). Supply Network Formation and Fragility. https://doi.org/10.17863/CAM.83976
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.
Identifiers
CWPE2028, C-INET2014
This record's DOI: https://doi.org/10.17863/CAM.83976
This record's URL: https://www.repository.cam.ac.uk/handle/1810/336555
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