Supply Network Formation and Fragility

American Economic Review, 2022, 112(8):2701–47

47 Pages Posted: 23 Feb 2020 Last revised: 23 Jun 2023

See all articles by Matthew Elliott

Matthew Elliott

University of Cambridge

Benjamin Golub

Northwestern University

Mathieu V. Leduc

Paris School of Economics (PSE)

Date Written: August 1, 2022


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.

Appendix available at

Keywords: network formation, fragility, reliability, robustness

JEL Classification: D85

Suggested Citation

Elliott, Matthew and Golub, Benjamin and Leduc, Mathieu V., Supply Network Formation and Fragility (August 1, 2022). American Economic Review, 2022, 112(8):2701–47, Available at SSRN: or

Matthew Elliott

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Benjamin Golub (Contact Author)

Northwestern University ( email )

Evanston, IL 60201
United States

Mathieu V. Leduc

Paris School of Economics (PSE) ( email )

48 boulevard Jourdan
Paris, 75014


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