Research & Work in Progress
Supply Chain Disruptions and Diversification (expected JMP), joint with Thomas Bourany and Gustavo González. In progress, 2023.
Abstract: Supply chain disruptions are becoming increasingly frequent, generating uncertainty for firms that need to source inputs to produce. In that context, how does supply chain disruption risk affect firms’ sourcing decisions? Would firms source from more foreign countries to diversify against this risk? Or will they be re-shoring instead? Would firms import from cheaper or less risky/riskier countries? To answer these questions, we propose a multi-country sourcing model, inspired by Antras, Fort, and Tintelnot (2017), where firms self-select into importing based on productivity, cost minimization, and trade disruptions that increase the cost of importing. We find that even with aggregate or idiosyncratic uncertainty, a pecking order exists, and bigger firms self-select into importing from a larger set of suppliers. We show that quantitatively the decrease in marginal cost is still the main driver of firms’ sourcing decisions, but risk affects this choice in a non-trivial way. Firm idiosyncratic import risk creates a positive option value of diversifying the set of suppliers, while country-specific aggregate shocks also affect market demand reducing firms’ profits. We estimate the supply chain disruption uncertainty and the fixed costs of sourcing using firms-level custom data from Chile and produce counterfactual analysis on the impact of Covid