Firms, Failures, and Fluctuations: The Macroeconomics of Supply Chain Disruptions
This paper studies how firm failures and the resulting disruptions to supply chains can amplify negative shocks. We develop a non-competitive model where customized supplier-customer relations increase productivity, and the relationship-specific surplus generated between firms and their suppliers is divided via bargaining. Changes in productivity alter the distribution of surplus throughout the economy and determine which firms are at the margin of failure. A firm’s failure may 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 the response of the equilibrium production network may propagate recessionary shocks.
We thank Carlos Molina for excellent research assistance. We are grateful to David Baqaee, Vasco Carvalho, Martin Jensen, Roland Kpodar, Glenn Magerman, Pooya Molavi, Ezra Oberfield, Ali Shourideh, Claudio Tebaldi, Andrea Vedolin, and seminar participants at Boston University, Columbia, FDIC, National Bank of Belgium, Northwestern, Penn, Queen Mary, University of Tokyo, UT-Austin Macro/International Conference, Deutsche Bundesbank–ECB Joint Spring Conference on Systemic Risk and the Macroeconomy, and ERC/LBS/CEPR Conference on Granularity for various comments and suggestions. This research has benefited from financial support from the International Monetary Fund (IMF)-Department for International Development (DFID) project on Macroeconomic Research in Low-Income Countries (Project id: 60925). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.