Speaker: Lauri Esala
Affiliation: University of Edinburgh
Date and time: Wednesday, April 30, 2025 14:30 (Santiago, GMT-04:00)
Location:

• Online meeting

Registration: seminarios@bcentral.cl

Abstract: This paper develops a dynamic theory of endogenous supply chain formation that speaks to two properties of real-world supply chains. First, firms often depend on a limited number of key buyers and suppliers, and may source potentially critical inputs from just a few suppliers. Second, long-term buyer-supplier relationships are time-consuming to form, and difficult to replace if lost. Consequently, the loss of trade partners can act as a potent channel of shock propagation. In my setup, forward-looking firms build their supply chains in an environment where link formation is sluggish due to search frictions. Both idiosyncratic shocks and bilateral search for better partners while matched create uncertainty about the value and duration of each linkage, even in steady state. I keep the problem tractable by leveraging continuous time, and by developing a new simulation-based solution method to solve large-scale versions of the model. In steady state, I exhibit a trade-off where firms’ forward-looking considerations about supply chain fragility and growth potential may dissuade them from forming matches with the highest profit, and firms' bilateral match-formation decisions may be socially suboptimal. I also study the consequences of a large-scale supply chain disturbance. I find that firms' endogenous matching behaviour speeds up the recovery, relative to a benchmark where the regeneration of supply chains happens exogenously. The most productive firms are able to rebuild their supply chains the fastest, sometimes at the expense of less productive firms.