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 .
We model the production of complex goods in a large supply network. Each firm sources several essential inputs through relationships with other firms. Due to the risk of such supply relationships being idiosyncratically disrupted, firms multisource inputs and strategically invest to make relationships with suppliers stronger. Aggregate production is robust to idiosyncratic disruptions. However, there is a regime in which equilibrium supply networks are fragile, with small aggregate shocks to relationships causing arbitrarily steep drops in output. The endogenous configuration of supply networks provides a new channel for the powerful amplification of shocks .
R
Firms source
Each firm sources
A
strategically
R
In equilibrium, aggregate
Aggregate
R
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
there is a regime in which equilibrium supply networks are fragile, with
R
cause discontinuous losses. We use the model to provide a unified account of a number of stylized facts about complex economies
to relationships causing arbitrarily steep drops in output. The endogenous configuration of supply networks provides a new channel for the powerful amplification of shocks