Are Supply Networks Efficiently Resilient?

This report highlights how market power and incomplete markets can lead decentralized supply networks to underinvest in production capacity, falling short of the socially optimal level of resilience. Upstream suppliers may lack incentives to invest in resilience because the benefits often flow to downstream firms.  

The authors identify several conditions that contribute to this underinvestment, including overdependence on spot markets, which are more susceptible to disruptions, limited competition, low scalability in production, and low substitutability of inputs. Three key policy interventions are proposed: 1. Direct subsidies to support capacity investments, 2. Incentives to promote pre-order markets, and 3. Structural reforms aimed at boosting competition and enhancing scalability.