Catastrophic disruption cascades driven by the nonlinearity of systemic risk

2026-07-22

AI Summary

This study investigates how firm failures propagate through supply chain networks to generate superlinear systemic risk. Leveraging granular, firm-level supply chain data from Ecuador, the authors develop a network reconstruction and risk quantification framework that reveals how simultaneous failures of multiple firms—driven by the irreplaceability of key suppliers—trigger extreme cascading disruptions. The analysis demonstrates that the failure of merely 0.14% of critical firm combinations can amplify systemic risk by up to 257-fold. Furthermore, the paper introduces an efficient method for identifying such high-risk firm constellations, offering a theoretical foundation for early-warning systems aimed at enhancing supply chain resilience against compound shocks, including natural disasters and geopolitical conflicts.

Abstract

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.

Problem

• systemic risk
• supply chain
• cascading failures
• firm-level network
• risk amplification

Innovation

• systemic risk amplification
• supply chain cascades
• nonlinear failure interactions
• firm-level network
• substitutability breakdown