Dynamic Shock Recovery in IO Networks with Priority Constraints

Abstract: Physical risks, such as droughts, floods, rising temperatures, earthquakes, infrastructure failures, and geopolitical conflicts, can ripple through global supply chains, raising costs, and constraining production across industries. Assessing these risks requires understanding not only their immediate effects, but also their cascading impacts. For example, a localized drought can disrupt the supply of critical raw materials such as cobalt or copper, affecting battery and electric vehicle production. Similarly, regional conflicts can impede cross-border trade, leading to broader economic consequences. Building on an existing model of simultaneous supply and demand shocks, we introduce a new propagation algorithm, Priority with Constraint, which modifies standard priority-based rationing by incorporating a minimum supply guarantee for all customers, regardless of their size or priority ranking. We also identify a buffer effect inherent in the Industry Proportional algorithm, which reflects real-world economic resilience. Finally, we extend the static shock propagation model to incorporate dynamic processes. We introduce mechanisms for gradual shock propagation, reflecting demand stickiness and the potential buffering role of inventories, and gradual recovery, modeling the simultaneous recovery of supply capacity and the inherent tendency for demand to return to pre-shock levels. Simulations demonstrate how the interplay between demand adjustment speed and supply recovery speed significantly influences the severity and duration of the economic impact after a shock.