We model the production of complex goods in a large supply network. Firms source several essential inputs through relationships with other firms. Relationships may fail, and given this idosyncratic risk , firms multisource inputs and make costly investments to make relationships with suppliers stronger (less likely to fail). We find that aggregate production is discontinuous in the strength of these relationships. This has stark implications for equilibrium outcomes. We give conditions under which the supply network is endogenously fragile , so that arbitrarily small negative shocks to relationship strength lead to a large, discontinuous drop in aggregate output .
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 .
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Relationships may fail, and given this idosyncratic risk
Due to the risk of such supply relationships being idiosyncratically disrupted
R
make costly investments
invest
R
(less likely to fail). We find that
. In equilibrium,
R
discontinuous in the strength of these relationships. This has stark implications for equilibrium outcomes.
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.
R
supply network is endogenously fragile , so that arbitrarily small negative shocks to relationship strength lead to a large, discontinuous drop in aggregate output
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