Resilience in Vertical Supply Chains

70 Pages Posted: 2 Oct 2023

See all articles by Gene M. Grossman

Gene M. Grossman

Princeton University - Princeton School of Public and International Affairs; Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Elhanan Helpman

Harvard University

Alejandro Sabal

Princeton University

Date Written: September 2023

Abstract

Forward-looking investments determine the resilience of firms' supply chains. Such investments confer externalities on other firms in the production network. We compare the equilibrium and optimal allocations in a general equilibrium model with an arbitrary number of vertical production tiers. Our model features endogenous investments in resilience, endogenous formation of supply links, and sequential bargaining over quantities and payments between firms in successive tiers. We derive policies that implement the first-best allocation, allowing for subsidies to input purchases, network formation, and investments in resilience. The first-best policies depend only on production function parameters of the pertinent tier. When subsidies to transactions are infeasible, the second-best subsidies for resilience and network formation depend on production function parameters throughout the network, and subsidies are larger upstream than downstream whenever the bargaining weights of buyers are non-increasing along the chain.

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Suggested Citation

Grossman, Gene M. and Helpman, Elhanan and Sabal, Alejandro, Resilience in Vertical Supply Chains (September 2023). NBER Working Paper No. w31739, Available at SSRN: https://ssrn.com/abstract=4589701

Gene M. Grossman (Contact Author)

Princeton University - Princeton School of Public and International Affairs ( email )

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Princeton University - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Elhanan Helpman

Harvard University ( email )

Alejandro Sabal

Princeton University ( email )

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United States

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