The Rise and Fall of Trust Networks

Kartik Anand, Prasanna Gai and Matteo Marsili
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Prasanna Gai: The Australian National University
Matteo Marsili: The Abdus Salam International Centre for Theoretical Physics

A chapter in Progress in Artificial Economics, 2010, pp 77-88 from Springer

Abstract: Abstract The working of economies relies on trust, with credit markets being a notable example. The evaporation of trust may precipitate the economy from a good to a bad state, with long-lasting and large scale structural changes, witness the 2007/8 global financial crisis. Drawing on insights from the literature on coordination games and network growth, we develop a simple model to clarify how trust breaks down in financial systems. We show how the arrival of bad news about a financial agent can lead others to lose confidence in it and how this, in turn, can spread across the entire system. Our model exhibits hysteresis behavior, suggesting that it takes considerable effort to regain trust once it has been broken, emphasizing the self-reinforcing nature of trust at the systemic level. Although simple, the model provides a plausible account of the credit freeze that followed the global financial crisis of 2007/8.

Keywords: Balance Sheet; Credit Market; Cash Holding; Coordination Game; Trust Network (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-642-13947-5_7

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DOI: 10.1007/978-3-642-13947-5_7

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