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