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Supply Chains

Paper Session

Sunday, Jan. 8, 2023 1:00 PM - 3:00 PM (CST)

Hilton Riverside, Chart B
Hosted By: American Economic Association
  • Chair: Sebastian Heise, Federal Reserve Bank of New York

Supply Network Robustness: Substitutability and Scalability

Chuan Du
,
Bank of England
Agostino Capponi
,
Columbia University
Joseph E. Stiglitz
,
Columbia University

Abstract

We study the transmission of shocks through supply network, and endogenize the establishment of supply relationships. We show that supply networks arising endogenously in the decentralized market overweigh individual cost savings, at the expenses of systemic robustness. Firms do
not fully internalize the benefits of building sufficient production capacity ex ante that would help the system as a whole address large shocks in supply and demand ex post. This wedge between the decentralized solution and a social planner's benchmark can be characterized by the degree of substitutability and scalability of different sectors of the economy.

Inflation Expectations and the Supply Chain

Elias Albagli
,
Central Bank of Chile
Francesco Grigoli
,
International Monetary Fund
Emiliano Luttini
,
Central Bank of Chile

Abstract

We show that firms rely on price changes observed along their supply chain to form expectations about aggregate inflation, and that these expectations have a complete pass-through to sales prices. Leveraging a unique dataset on Chilean firms merging expectation surveys and records from the VAT and customs registries, we document that changes in prices at which firms purchase inputs inform their forecasts of the economy's inflation. This is the case even if changes in input costs do not determine the inflation outcome. These findings reject the full-information rational-expectations hypothesis and are consistent with firms' disagreement about future inflation and inattention to macroeconomic news, which we document for Chile. Our results from a firm-level Phillips’ curve estimation suggest that firms' beliefs about inflation are a key determinant for their price-setting decisions. Therefore, we argue that the channel we highlight in this paper has the potential to lead to dispersion in inflation expectations, price dispersion, and weaken the expectation channel of policies.

Does Climate Action Flow through Global Supply-Chains?

Asad Rauf
,
University of Groningen
Swarnodeep Homroy
,
University of Groningen

Abstract

Firms are increasingly under pressure to focus on the climate impact of their operations. Recent studies have focused on the climate-related actions of firms in response to investor pressure, changing customer preferences, and costs of regulatory non-compliance. In this paper, we propose a new economic mechanism to explain the adoption of climate sustainability practices by firms. Specifically, we focus on the transmission of climate-related strategic choices and governance indicators along global supply chains.

Customer-supplier relationships are an important dissemination channel for corporate policies (Banerjee, Dasgupta, and Kim (2008), Cen, Maydew, Zhang, and Zuo (2017)). Recent evidence shows that relationships with key stakeholders are an important motivation for corporate ESG policies (Lins, Servaes, and Tamayo (2017)). Customers make relationship-specific investments in supply-chain networks, which exposes them to adverse shocks from their suppliers (Barrot and Sauvagnat (2016)). Therefore, customers have incentives to reduce potential sources of risk at their supplier firms, important among them being climate-related risks.

This paper shows that supply chain connections influence climate-responsible practices of firms. Using granular firm-level data, we show that suppliers adopt climate actions (such as emission initiatives and emission targets) and climate governance measures (such as board oversight and explicit managerial incentives to address climate issues) following customer firms' adoption of emission reduction targets. We estimate the probability function of supplier adoption under parametric and non-parametric settings. We, further, use shareholder pressure among the peer group of customer firms as an instrumental variable to establish causality. Transmission of climate-responsible practices seems to be driven by relative bargaining power rather than through geographic agglomeration of customer-supplier firms.

Economic Crises and the Global Supply Chain: The Effect of Multinational Network Shocks

Marti Mestieri
,
Federal Reserve Bank of Chicago and Pompeu Fabra University
Sergi Basco
,
University of Barcelona
Giulia Felice
,
Polytechnic University of Milan
Bruno Merlevede
,
Ghent University

Abstract

How do multinational firms adjust to economic shocks in foreign countries? A recent salient economic shock was the financial disruption in different European countries after the collapse of subprime mortgages in the United States (2007). In this paper, we empirically investigate how the financial shock to the countries of the affiliates affected the international organization of production and parent’s activity. We use a unique representative firm-level panel of European multinational parent-affiliates between 2005 and 2015. We exploit the heterogeneous initial exposure of parents (in the same country and industry) to affiliates located in later financially hit countries. The network shock of the parent is defined as a weighted average of the increase in the risk premium of the country of the affiliate between August 2007 and July 2012 (the onset and finish of financial turbulence in the Eurozone). We show that parents more exposed to financial network risk increased sales and revenues. We also document that these parents reorganize their multinational network of affiliates by moving away from ex-post risky locations and reshoring. Lastly, we show that this reorganization of production is mostly driven by vertical relationships. Our interpretation is that affiliates located in countries financially hit lost their comparative advantage and the parent chose to increase domestic production and contact affiliates in less ex-post risky countries. We develop a multi-country model with parents optimally choosing their organization of production to formally derive this result.
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles