Are Supply Networks Efficiently Resilient?
We show that supply networks are inefficiently, and insufficiently, resilient. Upstream firms can adjust capacity investments to hedge against supply and demand shocks. However, the social benefits of such investments are not internalized, because of market incompleteness and market power. Upstream firms underinvest in resilience, passing on the costs to downstream firms, and drive trade excessively toward the spot markets. Policies designed to incentivize capacity investment, reduce reliance on spot markets, and enhance competition ameliorate the externality.
More from NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, the Bulletin on Health, and the Bulletin on Entrepreneurship — as well as online conference reports, video lectures, and interviews.
