Quantifying Firm-Level Economic Systemic Risk from Nation-Wide Supply Networks

30 Pages Posted: 15 Apr 2021

See all articles by Christian Diem

Christian Diem

Complexity Science Hub Vienna; Vienna University of Economics and Business

András Borsos

Magyar Nemzeti Bank

Tobias Reisch

Medical University of Vienna

János Kertész

Central European University (CEU)

Stefan Thurner

Institute for Science of Complex Systems, Medical University of Vienna; Santa Fe Institute

Date Written: April 14, 2021

Abstract

Crises like COVID-19 or the Japanese earthquake in 2011 exposed the fragility of corporate supply networks. The production of goods and services is a highly interdependent process and can be severely impacted by the default of critical suppliers or customers. While knowing the impact of individual companies on national economies is a prerequisite for efficient risk management, the quantitative assessment of the involved economic systemic risks (ESR) is hitherto practically non-existent, mainly because of a lack of fine-grained data in combination with coherent methods. Based on a unique value added tax dataset we derive the detailed production network of an entire country and present a novel approach for computing the ESR of all individual firms. We demonstrate that a tiny fraction (0.035%) of companies has extraordinarily high systemic risk impacting about 23% of the national economic production should any of them default. Firm size alone cannot explain the ESR of individual companies; their position in the production networks does matter substantially. If companies are ranked according to their economic systemic risk index (ESRI), firms with a rank above a characteristic value have very similar ESRI values, while for the rest the rank distribution of ESRI decays slowly as a power-law; 99.8% of all companies have an impact on less than 1% of the economy. We show that the assessment of ESR is impossible with aggregate data as used in traditional Input-Output Economics. We discuss how simple policies of introducing supply chain redundancies can reduce ESR of some extremely risky companies.

Keywords: systemic risk, systemic stability, production networks, economic networks, shock propagation, cascading failure, network centrality measures

JEL Classification: L11, L14, L23, M11, R38, P00, O52

Suggested Citation

Diem, Christian and Borsos, András and Reisch, Tobias and Kertész, János and Thurner, Stefan, Quantifying Firm-Level Economic Systemic Risk from Nation-Wide Supply Networks (April 14, 2021). Available at SSRN: https://ssrn.com/abstract=3826514 or http://dx.doi.org/10.2139/ssrn.3826514

Christian Diem (Contact Author)

Complexity Science Hub Vienna ( email )

Josefstädter Straße 39
Vienna
Austria

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

András Borsos

Magyar Nemzeti Bank ( email )

Szabadsag ter 8-9
Budapest, H-1850
Hungary

Tobias Reisch

Medical University of Vienna ( email )

Vienna
Austria

János Kertész

Central European University (CEU) ( email )

Nador utca 9
Budapest, H-1051
Hungary

Stefan Thurner

Institute for Science of Complex Systems, Medical University of Vienna ( email )

Spitalgasse 23
Vienna, A-1090
Austria

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

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