Aggregate fluctuations in adaptive production networks

Significance Economic production is organized in supply chain networks. The resilience of supply chains is, therefore, crucial for robust economic growth. Governments have discussed policies to improve the resilience of supply chains, including the notion of reshoring parts of the supply chains to reduce dependence on foreign suppliers. A calibrated version of our theory predicts that restricting buyer–supplier links via such policies reduces output and increases economic fluctuations and that economic instability can be amplified through network adaptivity. Abstract To counteract the adverse effects of shocks, such as the global pandemic, on the economy, governments have discussed policies to improve the resilience of supply chains by reducing dependence on foreign suppliers. In this paper, we develop and quantify an adaptive production network model to study network resilience and the consequences of reshoring of supply chains. In our model, firms exit due to exogenous shocks or the propagation of shocks through the network, while firms can replace suppliers they have lost due to exit subject to switching costs and search frictions. Applying our model to a large international firm-level production network dataset, we find that restricting buyer–supplier links via reshoring policies reduces output and increases volatility and that volatility can be amplified through network adaptivity.

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