Risk-sharing and contagion in networks
Reads0
Chats0
TLDR
In this article, the authors investigate the socially optimal design of financial networks, that allows to tackle the trade-off between risk sharing and contagion, and identify conditions on the shock distribution under which full integration or maximal segmentation is optimal.Abstract:
We investigate the socially optimal design of financial networks, that allows to tackle the trade-off between risk sharing and contagion. We identify conditions on the shock distribution under which full integration or maximal segmentation is optimal. We also show that, under different conditions, the optimal network displays different levels of strength of linkages to other firms or intermediate degrees of segmentation. In the latter case, the individual and social incentives to establish linkages are not necessarily aligned. When firms face heterogeneous distributions of risks, they should optimally form linkages only with firms facing risks of the same kind.read more
Citations
More filters
Journal ArticleDOI
Systemic Risk and Stability in Financial Networks
Daron Acemoglu,Daron Acemoglu,Daron Acemoglu,Asuman Ozdaglar,Alireza Tahbaz-Salehi,Alireza Tahbaz-Salehi +5 more
TL;DR: In this article, the authors provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk, and show that financial contagion exhibits a form of phase transition as interbank connections increase.
Journal ArticleDOI
Financial Networks and Contagion
TL;DR: In this article, the authors model contagions and cascades of failures among organizations linked through a network of financial interdependencies and identify how the network propagates discontinuous changes in asset values triggered by failures.
Networks and the Macroeconomy: An Empirical Exploration
Abstract: The propagation of macroeconomic shocks through input-output and geographic networks can be a powerful driver of macroeconomic fluctuations. We first exposit that in the presence of Cobb-Douglas production functions and consumer preferences, there is a specific pattern of economic transmission whereby demand-side shocks propagate upstream (to input-supplying industries) and supply-side shocks propagate downstream (to customer industries) and that there is a tight relationship between the direct impact of a shock and the magnitudes of the downstream and the upstream indirect effects. We then investigate the short-run propagation of four different types of industry-level shocks: two demand-side ones (the exogenous component of the variation in industry imports from China and changes in federal spending) and two supply-side ones (TFP shocks and variation in knowledge/ideas coming from foreign patenting). In each case, we find substantial propagation of these shocks through the input-output network, with a pattern broadly consistent with theory. Quantitatively, the network-based propagation is larger than the direct effects of the shocks. We also show quantitatively large effects from the geographic network, capturing the fact that the local propagation of a shock to an industry will fall more heavily on other industries that tend to collocate with it across local markets. Our results suggest that the transmission of various different types of shocks through economic networks and industry interlinkages could have first-order implications for the macroeconomy.
Journal ArticleDOI
Intermediation and voluntary exposure to counterparty risk
TL;DR: In this article, the authors develop a model of the financial sector in which endogenous intermediation among debt financed banks generates excessive systemic risk, and show that a core-periphery network emerges in their model.
Journal ArticleDOI
Efficiency and stability of a financial architecture with too-interconnected-to-fail institutions☆
TL;DR: In this article, the authors estimate a network-based model of the over-the-counter interbank lending market in the US and quantify the efficiency-stability implications of limiting banks' size and interconnectedness.
References
More filters
Journal ArticleDOI
Bank Runs, Deposit Insurance, and Liquidity
TL;DR: The authors showed that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits, and showed that there are circumstances when government provision of deposit insurance can produce superior contracts.
Book
博弈论 : 矛盾冲突分析 = Game theory : analysis of conflict
Roger B. Myerson,剣平 費 +1 more
TL;DR: This chapter discusses Decision-Theoretic Foundations, Game Theory, Rationality, and Intelligence, and the Decision-Analytic Approach to Games, which aims to clarify the role of rationality in decision-making.
Book
Game Theory : Analysis of Conflict
TL;DR: In this article, the authors propose a game theoretic approach to games based on the Bayesian model and demonstrate the existence of Nash Equilibria and the Focal Point Effect.
Journal ArticleDOI
A Strategic Model of Social and Economic Networks
TL;DR: In this article, the authors study the stability and efficiency of social and economic networks when self-interested individuals can form or sever links, and show that there does not always exist a stable network that is efficient.
Journal ArticleDOI
Risk and Insurance In Village India
TL;DR: In this paper, the authors tested the full insurance model using data from three poor, high risk villages in the semi-arid tropics of southern India and found that household consumptions are not much influenced by contemporaneous own income, sickness, unemployment, or other idiosyncratic shocks.