RT Generic
T1 Risk-sharing and contagion in networks
A1 Cabrales, Antonio
A1 Gottardi, Piero
A1 Vega-Redondo, Fernando
A2 Universidad Carlos III de Madrid. Departamento de Economía, 
AB 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.
SN 2340-5031
YR 2013
FD 2013-01-20
LK https://hdl.handle.net/10016/16195
UL https://hdl.handle.net/10016/16195
LA eng
NO Weacknowledge financial support for the EUI Research Council, and from the Spanish Ministry of the Economyand Competitiveness under grants ECO2012-34581 and RESINEE.
DS e-Archivo
RD 20 may. 2024