We provide a strategic model of the formation of production networks that

subsumes the standard general equilibrium approach. The objective of firms in our

setting is to choose their supply relationships so as to maximize their profit at the

general equilibrium that unfolds. We show that this objective is equivalent to the

maximization by the firms of their eigenvector centrality in the production network.

As is common in network formation games based on centrality, there are multiple

Nash equilibria in our setting. We have investigated the characteristics and the

social efficiency of these equilibria in a stylized version of our model representing

international trade networks. We show that the impact of network structure on

social welfare is firstly determined by a trade-off between costs of increasing process

complexity and positive spillovers on productivity induced by the diversification of

the input mix. We further analyze a variant of our model that accounts for the

risks of disruption of supply relationships. In this setting, we characterize how social

welfare depends on the structure of the production network, the spatial distribution

of risks, and the process of shock aggregation in supply chains. We finally show

that simple trade policies characterized by sets of links that are either prevented

or catalyzed can be a powerful equilibrium selection device.

JEL Classification: D85, C65, D83

Keywords: general equilibrium, network formation, supply chain, production networks