We show that supply networks are inefficiently, and insufficiently, resilient. Upstream firms can expand their production capacity to hedge against supply and demand shocks. But the social benefits of such investments are not internalized due to market power and market incompleteness. Upstream firms under-invest in capacity and resilience, passing-on the costs to down-stream firms, and drive trade excessively towards the spot markets. There is a 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 enhance competition ameliorate the externality.
Authors
- Acknowledgements & Disclosure
- Agostino Capponi: Research supported, in part, by the National Science Foundation under the NSF CAREER award 1752326 Joseph Stiglitz: Supported, in part, by INET The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Chuan Du: Research undertaken whilst employed at the Bank of England, and the Board of Governors of the Federal Reserve System. The views expressed herein are those of the authors and not necessarily that of the National Bureau of Economic Research, nor of the Bank of England, nor of the Federal Reserve Board, or any of their respective Committees.
- DOI
- https://doi.org/10.3386/w32221
- Published in
- United States of America
