Working Paper: NBER ID: w31739
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; government policy; general equilibrium model
JEL Codes: D21; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forward-looking investments in resilience (G31) | enhanced supply chain robustness (M11) |
| enhanced supply chain robustness (M11) | positive externalities on downstream firms (L19) |
| firm investment in resilience (D25) | reduced likelihood of catastrophic disruptions (H84) |
| reduced likelihood of catastrophic disruptions (H84) | improved operational continuity (L15) |
| optimal transaction subsidies (H23) | counteract markup effects on marginal costs (D43) |
| bargaining weights of firms (C79) | influence markup effects on marginal costs (D43) |
| optimal subsidies for resilience investments (H84) | may vary across tiers (H73) |