  Natural and anthropogenic disasters frequently affect both the supply and
demand side of an economy. A striking recent example is the Covid-19 pandemic
which has created severe industry-specific disruptions to economic output in
most countries. Since firms are embedded in production networks, these direct
shocks to supply and demand will propagate downstream and upstream. We show
that existing input-output models which allow for binding demand and supply
constraints yield infeasible solutions when applied to pandemic shocks of three
major European countries (Germany, Italy, Spain). We then introduce a
mathematical optimization procedure which is able to determine best-case
feasible market allocations, giving a lower bound on total shock propagation.
We find that even in this best-case scenario network effects substantially
amplify the initial shocks. To obtain more realistic model predictions, we
study the propagation of shocks bottom-up by imposing different rationing rules
on firms if they are not able to satisfy incoming demand. Our results show that
overall economic impacts depend strongly on the emergence of input bottlenecks,
making the rationing assumption a key variable in predicting adverse economic
impacts. We further establish that the magnitude of initial shocks and network
density heavily influence model predictions.
