Specialization, Complexity & Resilience in Supply Chains
Alessandro Ferrari, Lorenzo Pesaresi
TL;DR
The paper develops a theory of supply chain formation where intermediate inputs must be compatible with final production, and intermediate producers choose input specialization by weighing private trading gains against the probability of finding compatible buyers. Final producers require multiple complementary inputs, creating a network externality: higher specialization raises value added in normal times but lowers resilience after disruptions because replacement becomes harder. A dynamic extension defines resilience as the probability that production restarts after a disruption, highlighting a trade-off: more specialized inputs yield higher output when operations run smoothly but slow recovery when shocks hit. Normative results show that a planner can decentralize the constrained-efficient allocation via lump-sum transfers, while non-fiscal standards (minimum interoperability) are welfare-improving and practically implementable. The analysis emphasizes that resilience should be weighed alongside productivity, with policy tools capable of mitigating over-specialization and improving the ability to recover from disruptions.
Abstract
We study how product specialization choices affect supply chain resilience. We propose a theory of supply chain formation in which only compatible inputs can be used in final production. Intermediate producers choose how much to specialize their goods, trading off higher value added against a smaller pool of compatible final producers. Final producers operate complex supply chains, requiring multiple complementary inputs. Specialization choices determine how quickly final producers can replace suppliers after disruptions, and thus supply chain resilience. In equilibrium, production inputs are over-specialized due to a novel network externality. Intermediate producers fail to internalize how their specialization choices affect the likelihood that final producers source all required inputs, and therefore the lost value added from complementary inputs if production halts. As a result, supply chains are more productive in normal times but less resilient than socially desirable. We characterize the optimal transfer that restores the efficient allocation and show that non-fiscal interventions, such as compatibility standards, are generally welfare-enhancing.