Centre for Development Economics
Department of Economics

Delhi School of Economics


The Effect of Supply Base Diversification on the Propagation of Shocks


Girish Bahal
(University of Western Australia)

 (Thursday, September 21, 2023, at 3:30 PM IST)
Venue: Amex Room


This paper studies the role of supply base diversification on the propagation of shocks through production networks. We identify exogenous shocks with the occurrence of natural disasters in the US between 1978 and 2017. We find that affected suppliers reduce customers’ sales growth by ≈ 25%, on average. Notably, firms with intermediate input purchases spanning many suppliers, geographies, or industries attenuate shocks to their suppliers by ≈ 70-80%. We interpret our empirical findings using a general equilibrium model of production networks. First, we establish that diverse firms exhibit gross substitutability among inputs relative to non-diverse firms, suggesting diverse firms insulate themselves by substituting away from disrupted suppliers. We then use the model to estimate the macroeconomic effect of supply base diversity, finding real GDP would have been ≈ $1.7 trillion lower in 2017 in the absence of diversified firms.
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