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Supply Network Formation and Fragility

By Matt Elliott
Academic Program: Please choose
Wednesday 27 May 2020, 11:30 - 12:30
We model the production of complex goods in a large supply network. Firms source
several essential inputs through relationships with other firms. Due to the risk of such supply
relationships being idiosyncratically disrupted, firms multisource inputs and invest to make 
relationships with suppliers stronger. In equilibrium, aggregate production is robust to idiosyncratic
disruptions. However, depending on parameters, the supply network may be robust or arbitrarily
sensitive to small aggregate shocks that affect the functioning of relationships. We give conditions
under which the equilibrium network is driven to a fragile configuration, where arbitrarily small
aggregate shocks cause discontinuous losses. We use the model to provide a unified account of a
number of stylized facts about complex economies

(Joint with Benjamin Golub and Mathew V. Leduc)