Supply Network Formation and Fragility

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. (JEL D21, G31, L14)

Supply Chain Resilience: Evidence from Indian Firms

“…We find both that firms that sourced products with many available suppliers and that had multiple suppliers for a given product are both more likely to break links. Such findings are consistent with Elliot et al (2022), who highlight that fragility should be particularly worrisome for firms that buy products not easily available.…”

“…To complement this standard measure, we construct measures related to the degree of complexity of a buyer j's supply chain. As highlighted by Elliot et al (2022), the complexity of a firm's supply chain is a key dimension to understand fragility or resilience following disruptions.…”

“…Finally, we also consider alternative measures of supply-chain complexity discussed in Elliot et al (2022). We construct measures of supply-chain depth (of degrees 1 and 2), which characterizes the average number of inputs necessary to produce each product the firm buys.…”

“…Somewhat surprisingly, firms that buy more complex products were less likely to break links after the shock, perhaps as they might assign more value to supplier-specific links, increasing resilience. To inform the largely theoretical supply-chain resilience literature, we assess whether measures suggested by Elliot et al (2022) are good proxies for resilience. We find both that firms that sourced products with many available suppliers and that had multiple suppliers for a given product are both more likely to break links.…”

“…The resilience of supply chains has been the focus of an emerging theoretical and quantitative literature (Elliot et al, 2022;Grossman et al, 2021). A few papers leverage firm-tofirm data to calibrate models studying production networks (Arkolakis et al, 2021;Dhyne et al, 2020).…”