Supply Network Formation and Fragility

56 Pages Posted: 23 Feb 2020 Last revised: 24 Sep 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: September 15, 2020

Abstract

We model the production of complex goods in a large supply network. Each firm
sources several essential inputs through relationships with other firms. Due to the risk of such
supply relationships being idiosyncratically disrupted, firms multisource inputs and strategically
invest to make relationships with suppliers stronger. Aggregate production is robust to idiosyncratic
disruptions. However, there is a regime in which equilibrium supply networks are fragile, with
small aggregate shocks to relationships causing arbitrarily steep drops in output. 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 (September 15, 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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