Specialization, Complexity & Resilience in Supply Chains

Abstract

Despite growing policy interest, the determinants of supply chain resilience are still not well understood. We propose a new theory of supply chain formation with compatibility frictions: only compatible inputs can be used in the final production process. Intermediate producers choose the degree of specialization of their goods, trading off higher productivity with a lower share of compatible final producers. We model supply chains as a complex production process, in which multiple complementary inputs need to be sourced for final production to take place. Specialization choices, production complexity, and search frictions jointly determine the resilience of supply chains. This environment is characterized by over-specialization due to a novel network externality arising from the interplay between frictional markets, endogenous specialization, and complex production. Intermediate producers fail to internalize how their specialization choices affect the likelihood that the final good is produced and, as a consequence, the foregone surplus from complementary inputs. In turn, over-specialization implies that supply chains are less resilient than efficient. We characterize how a social planner can decentralize efficient supply chain resilience through a targeted transaction subsidy.

Lorenzo Pesaresi

PhD Candidate in Economics

I’m a PhD candidate in Economics at the University of Zürich. My research interests are in Macroeconomics, Labor Economics, Search Theory, and Monetary Economics.