Networks and Economic Fragility

Many firms, banks, or other economic agents embedded in a network of codependencies may experience a contemporaneous, sharp drop in functionality or productivity following a shock-even if that shock is localized or moderate in magnitude. We offer an extended review of motivating evidence that such f...

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Bibliographic Details
Published in:Annual review of economics 2022-01, Vol.14 (1), p.665-696
Main Authors: Elliott, Matthew, Golub, Benjamin
Format: Article
Language:English
Subjects:
Banking
Financial systems
JEL D85
JEL E23
JEL L14
Networks
networks, fragility
production networks
Productivity
robustness
supply chains
supply disruptions
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Summary:Many firms, banks, or other economic agents embedded in a network of codependencies may experience a contemporaneous, sharp drop in functionality or productivity following a shock-even if that shock is localized or moderate in magnitude. We offer an extended review of motivating evidence that such fragility is a live concern in supply networks and in financial systems. We then discuss network models of fragility, focusing on the forces that make aggregate functionality especially sensitive to the economic environment. The key structural features of networks that determine their fragility are reviewed, with an emphasis on the importance of phase transitions. We then turn to endogenous decisions, both by market participants (e.g., firms investing in network formation and robustness) and by planners (e.g., authorities undertaking macroprudential regulation). Fragility has some distinctive implications for such decisions.
ISSN:1941-1383
1941-1391
DOI:10.1146/annurev-economics-051520-021647