Network Formation and Systemic Risk, Second Version

Selman Erol () and Rakesh Vohra ()
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Selman Erol: Department of Economics, University of Pennsylvania
Rakesh Vohra: Department of Economics, and Department of Electrical & Systems Engineering, University of Pennsylvania

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: This paper introduces a model of endogenous network formation and systemic risk. In it, strategic agents form networks that efficiently trade-off the possibility of systemic risk with the benefits of trade. Efficiency is a consequence of the high risk of contagion which forces agents to endogenize their externalities. Second, fundamentally ‘safer’ economies generate much higher interconnectedness, which in turn leads to higher systemic risk. Third, the structure of the network formed depends crucially on whether the shocks to the system are believed to be correlated or independent of each other. This underlines the importance of specifying the shock structure before investigating a given network as a particular network and shock structure could be incompatible.

Keywords: Network Formation; Systemic Risk; Contagion; Rationalizability; Core (search for similar items in EconPapers)
JEL-codes: D85 G01 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2014-08-29, Revised 2014-12-19
New Economics Papers: this item is included in nep-ban, nep-gth, nep-net and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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