Supply Chain Resilience: Should Policy Promote International Diversification or Reshoring?

Gene M. Grossman, Elhanan Helpman, Hugo Lhuillier

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

Little is known about optimal policy in the face of global supply chain disruptions. Should governments promote resilience by subsidizing backup sources of input supply in multiple countries? Should they encourage firms to source from safer domestic suppliers? We address these questions in a model of production with a critical input and exogenous risks of supply disturbances. With constant elasticity of substi-tution preferences, a subsidy for diversification achieves the constrained social optimum. When the demand elasticity rises with price, private investments in resilience may be socially excessive and the social plan-ner may wish to discourage diversification while favoring sourcing from abroad.

Original languageEnglish (US)
Pages (from-to)3462-3496
Number of pages35
JournalJournal of Political Economy
Volume131
Issue number12
DOIs
StatePublished - Dec 2023

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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