Firm-level propagation of shocks through supply-chain networks

The Propagation of the Economic Impact through Supply Chains: The Case of a Mega-City Lockdown against the Spread of COVID-19

“…Further, we assume that each firm keeps inventories of each input at a level randomly determined from the Poisson distribution. Following Inoue and Todo [5] where parameter values are calibrated from the case of the Great East Japan earthquake, we assume that firms target to keep inventories for nine days of production on average. When a lockdown directly or indirectly causes a reduction in production of particular firms, the supply of products of these firms to their customer firms declined.…”

“…We rely on the model of Inoue and Todo [5], an extension of existing agent-based models used to examine the propagation of shocks by natural disasters through supply chains of Hallegatte [16]. Each firm uses a variety of intermediates as inputs and delivers a sector-specific product to other firms and the final consumers.…”

“…These results are consistent with recent findings in the network science literature that the structure of networks significantly influences diffusion [7][8][9][10][11][12], Therefore, when a large industrial city connected with other regions and countries through supply chains in a complex manner is locked down to prevent the spread of COVID-19, the economic effect is most likely to propagate across regions and countries. To confirm this conjecture, we utilise the framework of Inoue and Todo [5] and quantify the economic effect of a lockdown of Tokyo on other regions. Tokyo is an appropriate case for the purpose of this study, because it is one of the largest cities in the world and a hub in global supply chains, and because recently policymakers including the governor of Tokyo have mentioned a possibility of a lockdown of Tokyo.…”

“…However, these studies rely on either a macroeconomic econometric model at the country level [13] or a general equilibrium model assuming international and inter-sectoral input-output linkages [14] and thus do not incorporate complex inter-firm linkages. As a result, the estimates of the previous studies may be largely undervalued, as suggested by the finding of Inoue and Todo [5]. Therefore, this study attempts to quantify the economic effect of COVID-19 that takes into account propagation of the effect across regions through inter-firm supply chains for the first time in the literature.…”

“…Tokyo is an appropriate case for the purpose of this study, because it is one of the largest cities in the world and a hub in global supply chains, and because recently policymakers including the governor of Tokyo have mentioned a possibility of a lockdown of Tokyo. Specifically, applying the agent-based model developed in Inoue and Todo [5] to the actual supply chains in Japan, we simulate what would happen to production activities outside Tokyo when Tokyo were locked down, or non-essential production activities in Tokyo were shut down for a certain period.…”