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Supply Chain Disruption and Reorganization: Theory and Evidence From Ukraine’s War
CEPR
2024.06.18
How do supply chain disruption and reorganization shape the impact of large-scale shocks, such as wars? Using firm-to-firm Ukrainian railway-shipment data during the 2014 Russia-Ukraine conflict, we document that firms with prior supplier or buyer linkages to the conflict areas substantially decreased their output. Simultaneously, firms with prior supplier linkages increased the number of suppliers in nonconflict areas, those with prior buyer linkages decreased them, and both firm types saw a reduction in the number of buyers in nonconflict areas. Our production-network disruption model accurately explains the observed firm-level output decline once we account for this network reorganization. The model predicts a 10% reduction in aggregate welfare in nonconflict areas through production-network disruption and reorganization, underscoring that localized conflicts have detrimental, far-reaching economic costs.