Catastrophic disruption cascades driven by the nonlinearity of systemic risk

Whether the COVID-19 pandemic or the Iran war, recent events have highlighted the systemic fragility of supply chains. Due to highly specific and mutual buyer-supplier dependencies, even the failure of a single firm can cause system-wide economic disruptions in the form of cascading failures up and down the supply chain network. Only recently has it become possible to quantify the systemic impact of the failure of individual firms on the total supply chain. Here, we demonstrate that the systemic risk contributions of combinations of firm failures can be drastically larger than the sum of the damage caused by the firms individually. Using a unique data set that allows us to reconstruct the national supply chain network of Ecuador at the firm-level, we find that combined failures can produce systemic risk amplifications of up to a factor of 257. However, only a tiny fraction of 0.14% of pairs exhibit a more than 4-fold amplification of systemic risk. We develop a simple method to identify firm combinations that lead to large systemic risk amplifications. The origin of these amplifications is a breakdown of the substitutability of defaulted suppliers. We discuss the implications of the existence of rare but strong systemic risk amplification for situations that simultaneously affect multiple firms, such as natural disasters and wars.

Source: arXiv:2607.20068v1 - http://arxiv.org/abs/2607.20068v1 PDF: https://arxiv.org/pdf/2607.20068v1 Original Link: http://arxiv.org/abs/2607.20068v1