The complex networks formed through customer–supplier relationships between firms have the potential to propagate shocks across the economy. In this column, ARATA examines the propagation of bankruptcies through customer-supplier networks through an analysis of daily bankruptcy records over an almost 4-year period and the transaction records of over one million Japanese firms, determining their relationships and how likely it is that a bankruptcy in one firm will spread to other firms in its supply chain.
Contrary to the supposition that increased connectivity increases risks of propagation of negative effects, ARATA discovers that the mitigating forces of networks are dominant. Bankruptcy propagation is observed empirically, but only very infrequently and with very limited reach. This is because the increased connectivity between firms disperses bankruptcy shocks such that they immediately die out.
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Bankruptcy propagation in customer–supplier networks: An empirical analysis in Japan
One of the characteristic features of our modern economy is interdependence between firms (Lamy 2013). Firms purchase and sell goods simultaneously and these customer-supplier relationships generate a huge and complex network, through which individual shocks can propagate across the economy. For example, since transactions between firms are frequently performed on trade credit, the bankruptcy of a customer may worsen the financial conditions of its suppliers and in turn lead to another bankruptcy of its suppliers. In essence, the bankruptcy of a few firms may trigger a large-scale bankruptcy propagation involving many firms. If so, how large is bankruptcy propagation empirically observed in an economy? What is the risk of a large-scale bankruptcy propagation?
