May 2024

Are Supply Networks Efficiently Resilient?

Agostino Capponi, Chuan Du, Joseph E. Stiglitz


We show that supply networks are inefficiently, and insufficiently, resilient. Upstream firms can expand their production capacity to hedge against supply and demand shocks. The social benefits of such investments are not internalized, however, because of market power and market incompleteness. Upstream firms underinvest in capacity and resilience, passing on the costs to downstream firms, and drive trade excessively toward 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.


PDF: Full Paper

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Last Update: May 28, 2024