Working Paper: CEPR ID: DP15074
Authors: Daron Acemoglu; Alireza TahbazSalehi
Abstract: This paper studies how firm failures and the resulting disruptions to supply chains can amplifynegative shocks. We develop a non-competitive model where customized supplier-customer relationsincrease productivity, and the relationship-specific surplus generated between firms andtheir suppliers is divided via bargaining. Changes in productivity alter the distribution of surplusthroughout the economy and determine which firms are at the margin of failure. A firm’s failuremay spread to its suppliers and customers and to firms in other parts of the production network.We provide existence, uniqueness, and a series of comparative statics results, and show how theresponse of the equilibrium production network may propagate recessionary shocks.
Keywords: Amplification; Bargaining; Business Cycles; Economic Fluctuations; Production Networks; Relationship-Specific Surplus; Supply Chains
JEL Codes: D57; E23; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm failures (G33) | cascading disruptions in supply chains (F69) |
| firm failures (G33) | reduced profitability for suppliers (L14) |
| firm failures (G33) | further failures in the network (D85) |
| lower productivity (O49) | firm failures (G33) |
| higher fixed costs (L11) | firm failures (G33) |
| productivity increases (O49) | reduced demand for inputs from upstream suppliers (L79) |
| increased profits for some firms (D21) | upstream failures (L95) |
| equilibrium response to shocks (D50) | amplify economic downturns (E32) |