Working Paper: CEPR ID: DP18491
Authors: Gene M. Grossman; Elhanan Helpman; Alejandro Sabal
Abstract: Forward-looking investments determine the resilience of firms' supply chains. Such investments confer externalities on other firms in the production network. We compare the equilibrium and optimal allocations in a general equilibrium model with an arbitrary number of vertical production tiers. Our model features endogenous investments in resilience, endogenous formation of supply links, and sequential bargaining over quantities and payments between firms in successive tiers. We derive policies that implement the first-best allocation, allowing for subsidies to input purchases, network formation, and investments in resilience. The first-best policies depend only on production function parameters of the pertinent tier. When subsidies to transactions are infeasible, the second-best subsidies for resilience and network formation depend on production function parameters throughout the network, and subsidies are larger upstream than downstream whenever the bargaining weights of buyers are non-increasing along the chain.
Keywords: supply chains; resilience; externalities; production networks
JEL Codes: D21; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| investments in resilience (G31) | resilience of supply chains (M11) |
| resilience of supply chains (M11) | externalities on other firms in the production network (D85) |
| subsidies (H20) | marginal costs faced by firms (D21) |
| bargaining dynamics in the supply chain (L14) | effectiveness of investments in resilience (H12) |
| optimal policies for resilience investments (H12) | production function parameters across the network (E23) |