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Risk-sharing and contagion in networks

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dc.affiliation.dptoUC3M. Departamento de Economíaes
dc.contributor.authorCabrales, Antonio
dc.contributor.authorGottardi, Piero
dc.contributor.authorVega-Redondo, Fernando
dc.contributor.editorUniversidad Carlos III de Madrid. Departamento de Economía
dc.date.accessioned2013-01-23T10:48:52Z
dc.date.available2013-01-23T10:48:52Z
dc.date.issued2013-01-20
dc.description.abstractThe aim of this paper is to investigate how the capacity of an economic system to absorb shocks depends on the specific pattern of interconnections established among financial firms. The key trade-off at work is between the risk-sharing gains enjoyed by firms when they become more interconnected and the large-scale costs resulting from an increased risk exposure. We focus on two dimensions of the network structure: the size of the (disjoint) components into which the network is divided, and the “relative density" of connections within each component. We find that when the distribution of the shocks displays "fat" tails extreme segmentation is optimal, while minimal segmentation and high density are optimal when the distribution exhibits "thin" tails. For other, less regular distributions intermediate degrees of segmentation and sparser connections are also optimal. We also find that there is typically a conflict between efficiency and pairwise stability, due to a “size externality" that is not internalized by firms who belong to components that have reached an individually optimal size. Finally, optimality requires perfect assortativity for firms in a component.
dc.description.sponsorshipWe acknowledge financial support for the EUI Research Council, and from the Spanish Ministry of the Economy and Competitiveness under grants ECO2012-34581 and RESINEE.
dc.format.mimetypeapplication/pdf
dc.identifier.issn2340-5031
dc.identifier.repecwe1301
dc.identifier.urihttps://hdl.handle.net/10016/16195
dc.language.isoeng
dc.relation.ispartofseriesUC3M Working papers. Economics
dc.relation.ispartofseries13-01
dc.relation.projectIDGobierno de España. ECO2012-34581es
dc.rightsAtribución-NoComercial-SinDerivadas 3.0 España
dc.rights.accessRightsopen access
dc.rights.urihttp://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.ecienciaEconomía
dc.subject.jelD85
dc.subject.jelC72
dc.subject.jelG21
dc.subject.otherFirm networks
dc.subject.otherContagion
dc.subject.otherRisk Sharing
dc.titleRisk-sharing and contagion in networks
dc.typeworking paper*
dc.type.hasVersionSMUR*
dspace.entity.typePublication
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