Gustavo González, Banco Central de Chile

Paper: Supply Chain Uncertainty and Diversification

Abstract: Supply chain uncertainty is becoming increasingly frequent, generating unpredictability for firms that
need to source inputs to produce. We aim to understand how this uncertainty affects firms’ sourcing
decisions. To answer this, and following Antràs et al.(2017), we write a multi-country sourcing model
where firms’ self-select into importing based on productivity, cost minimization, and trade uncertainty
that can alter the cost of importing. Our findings reveal that, even in the presence of aggregate or
idiosyncratic uncertainty, a pecking order emerges, with larger firms self-selecting into importing from
a more extensive set of suppliers. Despite the quantitative significance of marginal cost reduction as
the primary driver of firms’ sourcing decisions, risk introduces a nuanced dimension. Firm-specific
risk introduces a positive option value associated with diversifying the set of suppliers. Meanwhile,
aggregate uncertainty has a theoretically ambiguous impact, since it also affects the market demand.
In our structural analysis, we estimate both aggregate and idiosyncratic uncertainty and fixed costs of
sourcing using firm-level data from Chile. We then obtain a counterfactual using the change in
aggregate uncertainty from 2020 to 2023 and find a positive relationship between the change in
uncertainty and the change in both intensive and extensive margins. This research contributes to
under-standing how firms navigate supply chain risk and make strategic sourcing decisions in the face
of uncertainty.