DP15074 Firms, Failures, and Fluctuations: The Macroeconomics of Supply Chain Disruptions

Author(s): Daron Acemoglu, Alireza Tahbaz-Salehi
Publication Date: July 2020
Keyword(s): Amplification, Bargaining, business cycles, Economic Fluctuations, production networks, relationship-specific surplus, Supply Chains
JEL(s): D57, E23, E32
Programme Areas: Industrial Organization, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15074

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.