Supply Network Formation and Fragility

56 Pages Posted: 23 Feb 2020 Last revised: 13 Apr 2020

See all articles by Matthew Elliott

Matthew Elliott

Cambridge University

Benjamin Golub

Harvard University

Matthew V. Leduc

Paris School of Economics (PSE) / Université Paris 1

Date Written: April 9, 2020

Abstract

We model the production of complex goods in a large supply network. Firms source several essential inputs through relationships with other firms. Due to the risk of such supply relationships being idiosyncratically disrupted, firms multisource inputs and invest to make relationships with suppliers stronger. In equilibrium, aggregate production is robust to idiosyncratic disruptions. However, depending on parameters, the supply network may be robust or arbitrarily sensitive to small aggregate shocks that affect the functioning of relationships. We give conditions under which the equilibrium network is driven to a fragile configuration, where arbitrarily small aggregate shocks cause discontinuous losses. We use the model to provide a unified account of a number of stylized facts about complex economies.

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 (April 9, 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)

Harvard University ( email )

Littauer Center, Dept of Economics
1805 Cambridge Street
Cambridge, MA 02138
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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