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Are Supply Networks Efficiently Resilient?

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Abstract

We show that supply networks are inefficiently, and insufficiently, resilient. Upstream firms can expand their production capacity to hedge againstsupply and demand shocks. But the social benefits of such investments arenot internalized due to market power and market incompleteness. Upstreamfirms under-invest in capacity and resilience, passing-on the costs to downstreamfirms, and drive trade excessively towards the spot markets. There isa wedge between the market solution and a constrained optimal benchmark,which persists even without rare and large shocks. Policies designed to incentivize capacity investment, reduce reliance on spot markets, and enhancecompetition ameliorate the externality.

Suggested Citation

  • Agostino Capponi & Chuan Du & Joseph E. Stiglitz, 2024. "Are Supply Networks Efficiently Resilient?," Finance and Economics Discussion Series 2024-031, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-31
    DOI: 10.17016/FEDS.2024.031
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    References listed on IDEAS

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    More about this item

    Keywords

    Resilience; Capacity; Monopolistic competition; Supply network; Production;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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