Supply Network Formation and Fragility

77 Pages Posted: 23 Feb 2020 Last revised: 10 Jan 2022

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: January 7, 2022

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.

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 (January 7, 2022). 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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