Supply Network Formation and Fragility

We model the production of complex goods in a large supply network. Each firm sources several essential inputs through relationships with other firms. Individual are at risk idiosyncratic failure, which threatens to disrupt production. To protect against this, firms multisource and strategically invest make stronger, trading off cost investment benefits increased robustness. A network is called fragile if aggregate output very sensitive small shocks. show that networks intermediate productivity equilibrium, even though this always inefficient. The endogenous configuration provides new channel for powerful amplification (JEL D21, G31, L14)