Disruption risks in adaptive inter-firm networks
The globalization and interconnectedness of economic activities seem to carry with them new types of risks, often termed systemic risks. The recent financial crash is a prototypical example of a situation in which an exogenous shock has a disproportionate impact on the economy. One of the main amplification mechanisms is the propagation along supply chains via input-output relationships. The network structure of economic activity is therefore likely to influence the vulnerability of the system to external perturbation. This structure results from agent-level interactions.
The project investigates a simple theoretical model of adaptive inter-firm networks. Firms are represented as nodes, and trade relations as edges, directed from the supplier to the buyer. Firms produce using inputs from their suppliers, and sell their production to their customers, including households. Shocks on the production process are then applied exogenously and randomly to some firms. These perturbations create production shortages and profit losses that propagate along the trade links.
Firms are able to change their supply network and “rewire” trade links, in order to maximize profit while minimizing potential loss due to supply disruption. We will examine the influence of firms’ risk aversion on this rewiring process and on the resulting network topology. Are risks covered when all firms are risk adverse? What if a small proportion of firms are risk prone? We will also investigate the influence of the knowledge that firms have on their supply network. Finally we will consider a social learning process by which firms imitate the strategy of the top performers.