Chain of Firms' Bankruptcy: A Macroscopic Study of Link Effect in a Production Network

Advances in Complex Systems, Vol. 11, No. 5, pp. 703-717, 2008

Posted: 25 Nov 2009

See all articles by Yoshi Fujiwara

Yoshi Fujiwara

University of Hyogo - Graduate School of Simulation Studies

Abstract

A link in a supplier–customer network is usually a creditor-debtor relationship. If a firm goes into a state of financial insolvency or bankruptcy, then firms on its upstream are affected secondarily along the links. By using 10-year data from recent data on bankruptcy in Japan, we show that this "link effect" is by no means negligible in a nationwide economy. While the total debt of bankruptcy typically amounts to as much as a few percent of GDP in Japan, nearly 20% of all bankruptcies are due to the link effect. Interestingly, we find that such a link effect becomes comparable with other causes of bankruptcy, including poor performance in business (namely solo failure) with respect to the number of events, as the bankruptcy is larger. This means that the link effect grows for larger bankruptcies. Because the supplier-customer network has a heavy tail in its degree distribution, the ripple effect due to the bankruptcy chain is considerable. Since every firm is embedded in a giant network of production, this study would suggest the importance of understanding the heterogeneity in the large-scale network of suppliers and customers on a nationwide scale.

Keywords: Supplier–customer network, bankruptcy chain, power law, econophysics

Suggested Citation

Fujiwara, Yoshi, Chain of Firms' Bankruptcy: A Macroscopic Study of Link Effect in a Production Network. Advances in Complex Systems, Vol. 11, No. 5, pp. 703-717, 2008, Available at SSRN: https://ssrn.com/abstract=1512231

Yoshi Fujiwara (Contact Author)

University of Hyogo - Graduate School of Simulation Studies ( email )

7-1-28 Minato-jima, Minami-machi
Chuo-ku
Kobe, Hyogo 650-0047
Japan

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