Title: Domestic Sourcing of Essential Goods: Implications in the Face of Global Demand Shocks
Abstract: The recent COVID-19 pandemic has shown that during extraordinary events, global production for essential goods like personal protective equipment can be unable to satisfy a sudden surge in demand. These shortages can further be exacerbated if producing countries impose export restrictions to guarantee domestic supply.After the initial demand shock during the COVID-19 crisis, many politicians made calls to source essential goods domestically, i.e., to (re-)build local production capabilities. With this work, we are the first to study the incentives of countries to impose export restrictions and employ domestic sourcing strategies in a game theoretic model. We find that large countries often have an incentive to impose export restrictions in a crisis,even if other countries anticipate this behavior. This in turn often incentivizes other countries to domestically source at least some of their supply. In consequence, the global market during crisis may collapse. Finally,we illustrate our results numerically to demonstrate the effect of different model parameters, such as crisis strength, on the countries’ strategies and utilities.
