Risk-sharing and contagion in networks

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dc.contributor.author Cabrales, Antonio
dc.contributor.author Gottardi, Piero
dc.contributor.author Vega-Redondo, Fernando
dc.contributor.editor Universidad Carlos III de Madrid. Departamento de Economía
dc.date.accessioned 2013-01-23T10:48:52Z
dc.date.available 2013-01-23T10:48:52Z
dc.date.issued 2013-01-20
dc.identifier.issn 2340-5031
dc.identifier.uri http://hdl.handle.net/10016/16195
dc.description.abstract The 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.sponsorship We 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.mimetype application/pdf
dc.language.iso eng
dc.relation.ispartofseries UC3M Working papers. Economics
dc.relation.ispartofseries 13-01
dc.rights Atribución-NoComercial-SinDerivadas 3.0 España
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.other Firm networks
dc.subject.other Contagion
dc.subject.other Risk Sharing
dc.title Risk-sharing and contagion in networks
dc.type workingPaper
dc.subject.jel D85
dc.subject.jel C72
dc.subject.jel G21
dc.subject.eciencia Economía
dc.rights.accessRights openAccess
dc.relation.projectID Gobierno de España. ECO2012-34581
dc.type.version submitedVersion
dc.identifier.repec we1301
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