Recall and Response: Relationship Adjustments to Supply-chain Shocks

Abstract: We study changes in firms' sourcing behavior following negative shocks to their supply chains. We identify the impact of shocks to relationships between U.S. buyers and their foreign suppliers using recalls of consumer products for health or safety reasons. Compared to a control group, U.S. firms that source a recalled product from an unaffiliated supplier are more likely to discontinue orders from the supplier subject to the recall and increase their reliance on alternative suppliers. In contrast, buyers that are vertically integrated with the suppliers of recalled products maintain their reliance on the same suppliers. We interpret these findings using a model of buyer-supplier relationships, in which firms with larger market sizes benefit more from vertical integration and find it optimal to maintain these integrated relationships in the face of adverse shocks.