This was part of Algebraic Economics

Supply Network Formation and Fragility

Ben Golub  , Northwestern University

Monday, November 6, 2023


Supply Network Formation and Fragility (with Matt Elliot and M. V. Leduc); American Economic Review 2022, 112(8): 2701–2747  arXiv  SSRN   Appendix  Slides

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.


I'll also talk more broadly about topics in the following survey: Networks and Economic Fragility (with Matt Elliott); Annual Review of Economics, 14:665-696, August 2022