Firm-Level Simulation of Supply Chain Disruption Triggered by Actual and Predicted Earthquakes

Abstract

This paper reports simulations of supply chain disruptions regarding the Great East Japan Earthquake and the predicted Nankai Trough Earthquake. The simulations are based on the actual nationwide supply chains of Japan and on an agent-based model. As a result, we obtain the following findings. (1) Based on simulations of the Great East Japan Earthquake, we calibrate the parameters in the model. The result shows that the simulation reproduces the aftermath of the disaster well, which means the simulation captures the propagations of the damages and the recoveries from them on supply chains. (2) Indirect damages of both earthquakes geographically permeate the entire country in a quite short term. Additionally, the damages to firms show synchronized fluctuations due to the network structure. (3) Simulations of the Nankai Trough Earthquake show that direct damages are 12 times greater than those from the Great East Japan Earthquake, but indirect damages are approximately 4.5 times greater in a year. (4) By estimating indirect damage triggered by a single firm loss, approximately 10% of firms cause more than 10% damage of the entire supply chains.

Does the Supply Network Shape the Firm Size Distribution? The Japanese Case

“…The potential risk of a highly interconnected supply network can provide a rationale for the empirical results of Inoue and Todo (2018), who find a positive correlation between the damage suffered by Japanese firms due to the Great Eastern earthquake and their in-degree (relative number of customers). We show that, in general, this positive correlation is a result of the larger exposure to shocks for the more connected firms, which is due to the fact that micro-level volatility increases as the shock is transmitted upward in the supply chain.…”

“…In terms of aggregate outcomes, this sort of "snowball effect", as volatility is transmitted to suppliers, can be mitigated by input substitution (as argued by Carvalho et al, 2016;Inoue and Todo, 2018) and, at least partially, averaged out in national accounting, because intermediate outputs do not enter the calculation of GDP. However, since the particular mechanism of amplification of shocks that we identify shapes the firm size distribution, it also indirectly affects the macroeconomic dynamics because of the granular hypothesis.…”

“…Boehm et al (2019) extend the investigation beyond the Japanese borders and study the consequences of the supply chain disruption in Japan on non-Japanese suppliers, with particular focus on the implications of the limited substitutability of factors. More relevant for the scope of this paper, Inoue and Todo (2018) find that, in general, shocks occurring downstream are more consequential in terms of disruption of individual firms' activity, and the damage is proportional to the number of links for each supplier. The present paper investigates the role of demand shocks and their transmission along the supply network for the breaking down of the Gibrat law in one side of the distribution and the consequent emergence of a power law in the right tail.…”