Firm-Level Simulation of the Propagation of Economic Shocks Through Supply-Chain Networks

Social and economic networks can be a channel of negative shocks and thus deteriorate resilience and sustainability of our society. This study focuses on supply chains, or supplier--customer networks of firms and examines how production losses caused by natural disasters propagate to and persist in regions not directly hit through supply chains. We apply an agent-based model to the actual supply chains of nearly one million firms in Japan to estimate the direct and indirect effects of the 2011 Great East Japan earthquake. We then employ the same model to predict the effect of the Nankai earthquake, a mega earthquake predicted to hit major industrial cities in Japan in the near future. We find that the indirect effects of the disasters on production due to propagation (10.6% of GDP in the case of the Nankai earthquake) are significantly larger than their direct effects (0.5%). Our simulation analyses to compare the actual network with hypothetical networks suggest that these substantial indirect effects are more prominent and persistent when supply chains are characterized by scale-free properties, difficulty in substitution among intermediate products, and the complexity caused by cycles in networks