TY - JOUR
T1 - Optimal Resilience in Multitier Supply Chains*
AU - Grossman, Gene M.
AU - Helpman, Elhanan
AU - Sabal, Alejandro
N1 - Publisher Copyright:
© 2024 The Author(s). Published by Oxford University Press on behalf of President and Fellows of Harvard College.
PY - 2024/11/1
Y1 - 2024/11/1
N2 - 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 protective capabilities, 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 protective capabilities. 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 depend on production function parameters throughout the network, and subsidies are larger upstream than downstream whenever the bargaining weights of buyers are nonincreasing along the chain.
AB - 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 protective capabilities, 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 protective capabilities. 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 depend on production function parameters throughout the network, and subsidies are larger upstream than downstream whenever the bargaining weights of buyers are nonincreasing along the chain.
UR - http://www.scopus.com/inward/record.url?scp=85206825863&partnerID=8YFLogxK
U2 - 10.1093/qje/qjae024
DO - 10.1093/qje/qjae024
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AN - SCOPUS:85206825863
SN - 0033-5533
VL - 139
SP - 2377
EP - 2425
JO - Quarterly Journal of Economics
JF - Quarterly Journal of Economics
IS - 4
ER -