No. 2026-05 - Resilient-to-Fragile Transition and Excess Volatility in Supply Chain Networks

Abstract:

We study the disequilibrium dynamics of a stylised model of production networks in which firms use perishable and non-substitutable intermediate inputs, so that adverse idiosyncratic productivity shocks can trigger downstream shortages and output losses. To protect against such disruptions, firms hold precautionary inventories that act as buffer stocks. We show that, for a given dispersion of firm-level productivity shocks, there exists a critical level of inventories above which the economy remains in a stable stochastic steady state. Below this critical level, the system becomes fragile, i.e., it becomes prone to system-wide crises. As this resilience–fragility boundary is approached from above, aggregate output volatility rises sharply and diverges, even though shocks are purely idiosyncratic. Because inventories are costly, competitive pressures induce firms to economize on buffers. Although we do not explicitly model such costs, we argue that the resulting behaviour of individual firms drives the system close to criticality, generating persistent excess macroeconomic volatility — in other words, “small shocks, large cycles” — in line with other settings where efficiency and resilience are in tension with each other (Hynes et al., 2022; Moran et al., 2025). In the language of phase transitions, the resilient-to-fragile transition is continuous (supercritical): the economy exhibits a well-defined stochastic equilibrium with finite volatility on one side of the boundary, while beyond it the probability of a collapse in finite time tends to one. We characterize this transition primarily through numerical simulations and derive an analytical description in a high-perishability, high-connectivity limit. Finally, we show that the ability to rapidly reallocate demand across alternative suppliers shifts the critical boundary and can eliminate the fragile regime, underscoring the macroeconomic importance of inventory policies and supplier diversification for production network resilience.