Details

Related name

• Du, Chuan [Browse]
• Stiglitz, Joseph E. [Browse]
• National Bureau of Economic Research [Browse]

Series

• Working Paper Series (National Bureau of Economic Research) no. w32221. [More in this series]
• NBER working paper series no. w32221

Summary note

We show that supply networks are inefficiently, and insufficiently, resilient. Upstream firms can expand their production capacity to hedge against supply and demand shocks. But the social benefits of such investments are not internalized due to market power and market incompleteness. Upstream firms under-invest in capacity and resilience, passing-on the costs to down-stream firms, and drive trade excessively towards 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.

Notes

March 2024.

Source of description

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