1932

Abstract

Many firms, banks, or other economic agents embedded in a network of codependencies may experience a contemporaneous, sharp drop in functionality or productivity following a shock—even if that shock is localized or moderate in magnitude. We offer an extended review of motivating evidence that such fragility is a live concern in supply networks and in financial systems. We then discuss network models of fragility, focusing on the forces that make aggregate functionality especially sensitive to the economic environment. The key structural features of networks that determine their fragility are reviewed, with an emphasis on the importance of phase transitions. We then turn to endogenous decisions, both by market participants (e.g., firms investing in network formation and robustness) and by planners (e.g., authorities undertaking macroprudential regulation). Fragility has some distinctive implications for such decisions.

Loading

Article metrics loading...

/content/journals/10.1146/annurev-economics-051520-021647
2022-08-12
2024-04-23
Loading full text...

Full text loading...

/deliver/fulltext/economics/14/1/annurev-economics-051520-021647.html?itemId=/content/journals/10.1146/annurev-economics-051520-021647&mimeType=html&fmt=ahah

Literature Cited

  1. Acemoglu D, Akcigit U, Kerr W. 2016. Networks and the macroeconomy: an empirical exploration. NBER Macroecon. Annu. 30:273–335
    [Google Scholar]
  2. Acemoglu D, Antràs P, Helpman E. 2007. Contracts and technology adoption. Am. Econ. Rev. 97:3916–43
    [Google Scholar]
  3. Acemoglu D, Carvalho VM, Ozdaglar A, Tahbaz-Salehi A. 2012. The network origins of aggregate fluctuations. Econometrica 80:51977–2016
    [Google Scholar]
  4. Acemoglu D, Ozdaglar A, Tahbaz-Salehi A. 2015. Systemic risk and stability in financial networks. Am. Econ. Rev. 105:564–608
    [Google Scholar]
  5. Acemoglu D, Tahbaz-Salehi A. 2020. Firms, failures, and fluctuations: the macroeconomics of supply chain disruptions NBER Work. Pap. 27565
  6. Albert R, Jeong H, Barabási AL. 2000. Error and attack tolerance of complex networks. Nature 406:6794378–82
    [Google Scholar]
  7. Allen F, Babus A 2009. Networks in finance. The Network Challenge: Strategy, Profit, and Risk in an Interlinked World PR Kleindorfer, YJ Wind 367–82 Upper Saddle River, NJ: Wharton Sch. Bus.
    [Google Scholar]
  8. Amelkin V, Vohra R. 2019. Yield uncertainty and strategic formation of supply chain networks. arXiv:1907.09943 [cs]
  9. Andrews I, Barron D. 2016. The allocation of future business: dynamic relational contracts with multiple agents. Am. Econ. Rev. 106:92742–59
    [Google Scholar]
  10. Atalay E. 2017. How important are sectoral shocks?. Am. Econ. J. Macroecon. 9:4254–80
    [Google Scholar]
  11. Aymanns C, Georg CP, Golub B. 2020. Illiquidity spirals in coupled over-the-counter markets. Res. Pap. 2018/10, Univ. St. Gallen, St. Gallen Switz:.
  12. Babus A, Hu TW. 2017. Endogenous intermediation in over-the-counter markets. J. Financ. Econ. 125:1200–15
    [Google Scholar]
  13. Baqaee DR. 2018. Cascading failures in production networks. Econometrica 86:51819–38
    [Google Scholar]
  14. Baqaee DR, Farhi E. 2019. The macroeconomic impact of microeconomic shocks: beyond Hulten's theorem. Econometrica 87:41155–203
    [Google Scholar]
  15. Baqaee DR, Farhi E. 2020. Productivity and misallocation in general equilibrium. Q. J. Econ. 135:1105–63
    [Google Scholar]
  16. Barabási AL. 2013. Network science. Philos. Trans. R. Soc. A 371: 1987.20120375
    [Google Scholar]
  17. Barrot JN, Sauvagnat J. 2016. Input specificity and the propagation of idiosyncratic shocks in production networks. Q. J. Econ. 131:31543–92
    [Google Scholar]
  18. Beaulieu D. 2021. Report: Ocean carrier reliability drops while freight rates increase. Supply Chain Outlook 25:93–95
    [Google Scholar]
  19. Benoit S, Colliard JE, Hurlin C, Pérignon C. 2017. Where the risks lie: a survey on systemic risk. Rev. Finance 21:1109–52
    [Google Scholar]
  20. Bernanke BS. 2018. The real effects of disrupted credit: evidence from the global financial crisis. Brookings Pap. Econ. Activity 2018:2251–342
    [Google Scholar]
  21. Bernheim BD, Bagwell K. 1986. Is everything neutral? NBER Work. Pap. 2086
  22. Bernheim BD, Bagwell K. 1988. Is everything neutral?. J. Political Econ. 96:2308–38
    [Google Scholar]
  23. Bimpikis K, Candogan O, Ehsani S. 2019. Supply disruptions and optimal network structures. Manag. Sci. 65:125504–17
    [Google Scholar]
  24. Bimpikis K, Fearing D, Tahbaz-Salehi A. 2018. Multisourcing and miscoordination in supply chain networks. Oper. Res. 66:41023–39
    [Google Scholar]
  25. Blume L, Easley D, Kleinberg J, Kleinberg R, Tardos É. 2011. Which networks are least susceptible to cascading failures?. 2011 IEEE 52nd Annual Symposium on Foundations of Computer Science393–402 Piscataway, NJ: IEEE
    [Google Scholar]
  26. Board S. 2011. Relational contracts and the value of loyalty. Am. Econ. Rev. 101:73349–67
    [Google Scholar]
  27. Boss M, Elsinger H, Summer M, Thurner S. 2004. Network topology of the interbank market. Quant. Finance 4:6677–84
    [Google Scholar]
  28. Brioschi F, Buzzacchi L, Colombo MG. 1989. Risk capital financing and the separation of ownership and control in business groups. J. Bank. Finance 13:4747–72
    [Google Scholar]
  29. Budish E, Roin BN, Williams H. 2015. Do firms underinvest in long-term research? Evidence from cancer clinical trials. Am. Econ. Rev. 105:72044–85
    [Google Scholar]
  30. Buldyrev SV, Parshani R, Paul G, Stanley HE, Havlin S. 2010. Catastrophic cascade of failures in interdependent networks. Nature 464:72911025–28
    [Google Scholar]
  31. Cabrales A, Gottardi P, Vega-Redondo F. 2017. Risk sharing and contagion in networks. Rev. Financ. Stud. 30:93086–127
    [Google Scholar]
  32. Carvalho V. 2010. Aggregate fluctuations and the network structure of intersectoral trade Econ. Work. Pap. 1206, Univ. Pompeu Fabra Barcelona:
  33. Carvalho V, Elliott M, Spray J. 2021a. Network bottlenecks and market power. Unpubl. Ms. https://sites.google.com/view/matthewlelliott/home/bottlenecks
  34. Carvalho V, Elliott M, Spray J. 2021b. Supply chain bottlenecks in a pandemic. Work. Pap., Univ. Cambridge Cambridge, UK: https://covid.econ.cam.ac.uk/files/carvalho-files/BottlenecksPandemicNote.pdf
  35. Carvalho VM, Nirei M, Saito YU, Tahbaz-Salehi A. 2020. Supply Chain Disruptions: Evidence from the Great East Japan Earthquake Cambridge, UK: Univ. Cambridge Press
  36. Carvalho VM, Tahbaz-Salehi A. 2019. Production networks: a primer. Annu. Rev. Econ. 11:635–63
    [Google Scholar]
  37. Centola D, Macy M. 2007. Complex contagions and the weakness of long ties. Am. J. Sociol. 113:3702–34
    [Google Scholar]
  38. Choi S, Galeotti A, Goyal S. 2017. Trading in networks: theory and experiments. J. Eur. Econ. Assoc. 15:4784–817
    [Google Scholar]
  39. Choi TY, Rogers D, Vakil B. 2021. Coronavirus is a wake-up call for supply chain management. Harvard Business Review March 27. https://hbr.org/2020/03/coronavirus-is-a-wake-up-call-for-supply-chain-management
    [Google Scholar]
  40. Christensen D, Garfias F. 2018. Can you hear me now? How communication technology affects protest and repression. Q. J. Political Sci. 13:189–117
    [Google Scholar]
  41. Chwe MSY. 2000. Communication and coordination in social networks. Rev. Econ. Stud. 67:11–16
    [Google Scholar]
  42. Ciccone A. 2002. Input chains and industrialization. Rev. Econ. Stud. 69:3565–87
    [Google Scholar]
  43. Craig B, von Peter G 2014. Interbank tiering and money center banks. J. Financ. Intermed. 23:3322–47
    [Google Scholar]
  44. di Giovanni J, Levchenko AA, Mejean I. 2014. Firms, destinations, and aggregate fluctuations. Econometrica 82:41303–40
    [Google Scholar]
  45. Di Maggio M, Franzoni F, Kermani A, Sommavilla C. 2019. The relevance of broker networks for information diffusion in the stock market. J. Financ. Econ. 134:2419–46
    [Google Scholar]
  46. Dodds P, Watts D. 2004. Universal behavior in a generalized model of contagion. Phys. Rev. Lett. 92:218701
    [Google Scholar]
  47. Dziubiński M, Goyal S, Vigier A. 2016. Conflict and networks. The Oxford Handbook of the Economics of Networks Y Bramoullé, A Galeotti, BW Rogers 215–43 Oxford, UK: Oxford Univ. Press
    [Google Scholar]
  48. Easley D, Kleinberg J. 2010. Networks, Crowds, and Markets: Reasoning About a Highly Connected World Cambridge, UK: Cambridge Univ. Press
  49. Economist. 2018. China's grip on electronics manufacturing will be hard to break. Economist Oct. 11. https://www.economist.com/business/2018/10/11/chinas-grip-on-electronics-manufacturing-will-be-hard-to-break
    [Google Scholar]
  50. Economist. 2021. Businesses are proving quite resilient to the pandemic but that does not make up for a lack of demand. Economist May 16. https://www.economist.com/briefing/2020/05/16/businesses-are-proving-quite-resilient-to-the-pandemic
    [Google Scholar]
  51. Eisenberg L, Noe TH. 2001. Systemic risk in financial systems. Manag. Sci. 47:2236–49
    [Google Scholar]
  52. Elliott M, Georg CP, Hazell J 2021a. Systemic risk shifting in financial networks. J. Econ. Theory 191:105157
    [Google Scholar]
  53. Elliott M, Golub B, Jackson MO 2014. Financial networks and contagion. Am. Econ. Rev. 104:103115–53
    [Google Scholar]
  54. Elliott M, Golub B, Leduc MV. 2022. Supply network formation and fragility. Am. Econ. Rev In press
    [Google Scholar]
  55. Elliott M, Hazell J, Georg CP. 2018. Systemic risk-shifting in financial networks. Work. Pap., Cambridge Univ./Univ. Cape Town/Princeton Univ.
  56. Elliott M, Jackson MO. 2022. Globalizing supply chains: the impact on fragility and innovation. Unpubl. Ms. https://sites.google.com/view/matthewlelliott/home/globalization
  57. Ellison G. 1993. Learning, local interaction, and coordination. Econometrica 61:51047–71
    [Google Scholar]
  58. Erol S, Vohra R. 2018. Network formation and systemic risk. Work. Pap., Carnegie Mellon Univ./Univ. Pa.
  59. Farboodi M. 2017. Intermediation and voluntary exposure to counterparty risk. Work. Pap., Princeton Univ. Princeton, NJ:
  60. FCIC (Financ. Crisis Inq. Comm.) 2011. The financial crisis inquiry report: the final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States including dissenting views. Final Rep., FCIC Washington, DC:
  61. Fedenia M, Hodder JE, Triantis AJ. 1994. Cross-holdings: estimation issues, biases, and distortions. Rev. Financ. Stud. 7:161–96
    [Google Scholar]
  62. Flexport Ed. Team 2021. Demand shock to logistics networks proving global and persistent. Flexport Novemb. 5. https://www.flexport.com/research/demand-shock-to-logistics-networks-proving-global-persistent/
    [Google Scholar]
  63. Foerster AT, Sarte PDG, Watson MW. 2011. Sectoral versus aggregate shocks: a structural factor analysis of industrial production. J. Political Econ. 119:11–38
    [Google Scholar]
  64. Fricke D, Lux T. 2014. Core–periphery structure in the overnight money market: evidence from the e-mid trading platform. Comput. Econ. 45:3359–95
    [Google Scholar]
  65. Gabaix X. 2011. The granular origins of aggregate fluctuations. Econometrica 79:3733–72
    [Google Scholar]
  66. Gai P, Kapadia S. 2010. Contagion in financial networks. Proc. R. Soc. A 466:21202401–23
    [Google Scholar]
  67. Glasserman P, Young HP. 2015. How likely is contagion in financial networks?. J. Bank. Finance 50:383–99
    [Google Scholar]
  68. Glasserman P, Young HP. 2016. Contagion in financial networks. J. Econ. Lit. 54:3779–831
    [Google Scholar]
  69. Goyal S, Vega-Redondo F. 2007. Structural holes in social networks. J. Econ. Theory 137:1460–92
    [Google Scholar]
  70. Granovetter M. 1978. Threshold models of collective behavior. Am. J. Sociol. 83:61420–43
    [Google Scholar]
  71. Grassi B. 2017. IO in I-O: size, industrial organization, and the input-output network make a firm structurally important. Work. Pap., Bocconi Univ. Milan:
  72. Haldane AG. 2009. Rethinking the financial network Speech presented at the Financial Student Association Amsterdam: April 29
  73. Helper S, MacDuffie JP, Sabel C. 2000. Pragmatic collaborations: advancing knowledge while controlling opportunism. Ind. Corp. Change 9:3443–88
    [Google Scholar]
  74. Helper S, Soltas E. 2021. Why the pandemic has disrupted supply chains. White House Written Materials Blog June 17. https://www.whitehouse.gov/cea/written-materials/2021/06/17/why-the-pandemic-has-disrupted-supply-chains/
    [Google Scholar]
  75. Hendershott T, Li D, Livdan D, Schürhoff N. 2020. Relationship trading in over-the-counter markets. J. Finance 75:2683–734
    [Google Scholar]
  76. Horvath M. 2000. Sectoral shocks and aggregate fluctuations. J. Monet. Econ. 45:169–106
    [Google Scholar]
  77. Hulten CR. 1978. Growth accounting with intermediate inputs. Rev. Econ. Stud. 45:3511–18
    [Google Scholar]
  78. in 't Veld D, van Lelyveld I. 2014. Finding the core: network structure in interbank markets. J. Bank. Finance 49:27–40
    [Google Scholar]
  79. Iori G, De Masi G, Precup OV, Gabbi G, Caldarelli G 2008. A network analysis of the Italian overnight money market. J. Econ. Dyn. Control 32:1259–78
    [Google Scholar]
  80. Jackson MO. 2008. Social and Economic Networks Princeton, NJ: Princeton Univ. Press
  81. Jackson MO, Pernoud A 2019. What makes financial networks special? Distorted investment incentives, regulation, and systemic risk measurement. Work. Pap. Stanford Univ. Stanford, CA:
  82. Jackson MO, Pernoud A 2020. Credit freezes, equilibrium multiplicity, and optimal bailouts in financial networks. arXiv:2012.12861 [cs.GT]
  83. Jackson MO, Pernoud A 2021. Systemic risk in financial networks: a survey. Annu. Rev. Econ. 13:171–202
    [Google Scholar]
  84. Jackson MO, Rogers BW 2007. Relating network structure to diffusion properties through stochastic dominance. B.E. J. Theor. Econ. 7:1 https://doi.org/10.2202/1935-1704.1341
    [Crossref] [Google Scholar]
  85. Jackson MO, Yariv L 2007. Diffusion of behavior and equilibrium properties in network games. Am. Econ. Rev. 97:292–98
    [Google Scholar]
  86. Jones CI. 2011. Intermediate goods and weak links in the theory of economic development. Am. Econ. J. Macroecon. 3:21–28
    [Google Scholar]
  87. Kikkawa A, Magerman G, Dhyne E. 2018. Imperfect competition and the transmission of shocks: the network matters. Work. Pap., Univ. Chicago/Univ. Libre Bruxelles/Natl. Bank Belg.
  88. Koren M, Tenreyro S. 2007. Volatility and development. Q. J. Econ. 122:1243–87
    [Google Scholar]
  89. Kremer M. 1993. The O-ring theory of economic development. Q. J. Econ. 108:3551–75
    [Google Scholar]
  90. Langfield S, Liu Z, Ota T. 2014. Mapping the UK interbank system. J. Bank. Finance 45:288–303
    [Google Scholar]
  91. Leary A. 2021. Biden touts infrastructure proposal in chip-shortage meeting. Wall Street Journal April 12. https://www.wsj.com/articles/biden-touts-infrastructure-proposal-in-chip-shortage-meeting-11618253271
    [Google Scholar]
  92. Levchenko AA. 2007. Institutional quality and international trade. Rev. Econ. Stud. 74:3791–819
    [Google Scholar]
  93. Levine D. 2012. Production chains. Rev. Econ. Dyn. 15:3271–82
    [Google Scholar]
  94. Linton T, Vakil B. 2021. Coronavirus is proving we need more resilient supply chains. Harvard Bus. Rev. https://hbr.org/2020/03/coronavirus-is-proving-that-we-need-more-resilient-supply-chains
    [Google Scholar]
  95. Lippert S, Spagnolo G. 2011. Networks of relations and word-of-mouth communication. Games Econ. Behav. 72:1202–17
    [Google Scholar]
  96. Liu E. 2019. Industrial policies in production networks. Q. J. Econ. 134:41883–948
    [Google Scholar]
  97. Lucas RE Jr 1988. On the mechanics of economic development. J. Monet. Econ. 22:13–42
    [Google Scholar]
  98. McLain S. 2021. Auto makers retreat from 50 years of ‘just in time’ manufacturing. Wall Street Journal May 3. https://www.wsj.com/articles/auto-makers-retreat-from-50-years-of-just-in-time-manufacturing-11620051251
    [Google Scholar]
  99. Meier M, Pinto E 2020. Covid-19 supply chain disruptions. Covid Econ. 48:139–70
    [Google Scholar]
  100. Montanari A, Saberi A. 2010. The spread of innovations in social networks. PNAS 107:4720196–201
    [Google Scholar]
  101. Morris S. 1997. Interaction games: a unified analysis of incomplete information, local interaction, and random matching. Work. Pap. 97-08-072E, Santa Fe Inst., Santa Fe, NM
  102. Morris S. 2000. Contagion. Rev. Econ. Stud. 67:157–78
    [Google Scholar]
  103. Nikolsko-Rzhevskyya A, Talaverab O, Vuc N. 2020. The flood that caused a drought. Discuss. Pap. 20-14, Univ. Birmingham Birmingham, UK:
  104. Rogers LC, Veraart LA. 2013. Failure and rescue in an interbank network. Manag. Sci. 59:4882–98
    [Google Scholar]
  105. Roy S, Ellis C, Shiva S, Dasgupta D, Shandilya V, Wu Q. 2010. A survey of game theory as applied to network security. 2010 43rd Hawaii International Conference on System Sciences1–10 Piscataway, NJ: IEEE
    [Google Scholar]
  106. Sheffi Y, Rice JB Jr. 2005. A supply chain view of the resilient enterprise. MIT Sloan Manag. Rev. 47:41–48
    [Google Scholar]
  107. Simchi-Levi D, Schmidt W, Wei Y. 2014. From superstorms to factory fires: managing unpredictable supply-chain disruptions. Harvard Bus. Rev. 92:296–101
    [Google Scholar]
  108. Strogatz SH. 2001. Exploring complex networks. Nature 410:268–76
    [Google Scholar]
  109. Uzzi B. 1997. Social structure and competition in interfirm networks: the paradox of embeddedness. Adm. Sci. Q. 42:135–67
    [Google Scholar]
  110. Wang X, Disney SM. 2016. The bullwhip effect: progress, trends and directions. Eur. J. Oper. Res. 250:3691–701
    [Google Scholar]
/content/journals/10.1146/annurev-economics-051520-021647
Loading
/content/journals/10.1146/annurev-economics-051520-021647
Loading

Data & Media loading...

Supplemental Material

Supplementary Data

  • Article Type: Review Article
This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error