Celian Colon is a PhD student visiting INET Oxford from the Ecole Polytechnique, Paris

Abstract: Increasingly complex supply chains are prone to propagation phenomena. Unexpected and local events can cascade and spark systemic disruptions. Interconnected firms influence each other in terms of risk profile and mitigation strategy. Given these interdependencies, we wonder how firm behaviors affect the propagation of disruptions. Are systemic risks best tackled when all firms minimize their own risks? Which firm can most effectively reduce systemic risks? We formulate a stylized model of supply chains using complex networks, and analyze decentralized risk strategies using evolutionary game theory. We focus on the building of inventory for perishable goods. We found that mitigating risks induce positive externalities to upstream and downstream firm. This creates a misalignment between firm-level and supply chain-level objectives, and a potential for systemic risk reduction. A top-down allocation risk mitigation efforts cannot realize this potential if only based on network indicators. Decentralized coordination can however significantly reduce systemic risks, even if firms cooperate with only few business partners.


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