Propagation of Negative Shocks through Firm Networks: Evidence from simulation on comprehensive supply chain data

This paper examines how negative shocks due to, for example, natural disasters, propagate through supply chains, applying a simulation technique to actual data on supply chains of Japanese firms. We obtained the following five results. (1) Network structures severely affect the speed of propagation in the medium run and total loss in the long run. The scale-free nature of the actual supply chain network, i.e., the power law degree distribution, leads to faster propagation, while dense links between firms within the community in the actual network slow propagation. (2) More intensive damages, i.e., larger damages to fewer firms, result in faster propagation than extensive damages of the same total size. (3) When substitution of undamaged suppliers for damaged suppliers is more difficult to achieve, propagation of negative shocks becomes substantially fast. (4) Direct damages in industrial regions promote faster propagation than those in rural regions. (5) Different sectoral damages cause large differences in the speed of propagation and the long-run loss. All of these results imply that the same size of direct damages by disasters can generate considerably different damages, depending on the structure of the supply chain network in the economy.