Specialization, Complexity & Supply Chain Resilience

Abstract

Despite growing policy interest, the determinants of supply chain resilience are still not well understood. We propose a new theory of frictional supply chain formation where firms choose the specialization of their goods. Higher specialization increases productivity but reduces the trading probability. The production process is complex, meaning that multiple key inputs need to be sourced for final production to take place. Supply chain resilience is shaped by average specialization of goods, search frictions and production complexity. We show that this environment is often characterized by over-specialization due to a novel network externality arising from the interplay between frictional markets, endogenous specialization and complex production. 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 Zurich. My research interests are Macroeconomics, Labor Economics, Search Theory, and Monetary Economics.