May's Instability in Large Economies

Jos\'e Moran and Jean-Philippe Bouchaud

Papers from arXiv.org

Abstract: Will a large economy be stable? Building on Robert May's original argument for large ecosystems, we conjecture that evolutionary and behavioural forces conspire to drive the economy towards marginal stability. We study networks of firms in which inputs for production are not easily substitutable, as in several real-world supply chains. Relying on results from Random Matrix Theory, we argue that such networks generically become dysfunctional when their size increases, when the heterogeneity between firms becomes too strong or when substitutability of their production inputs is reduced. At marginal stability and for large heterogeneities, we find that the distribution of firm sizes develops a power-law tail, as observed empirically. Crises can be triggered by small idiosyncratic shocks, which lead to "avalanches" of defaults characterized by a power-law distribution of total output losses. This scenario would naturally explain the well-known "small shocks, large business cycles" puzzle, as anticipated long ago by Bak, Chen, Scheinkman and Woodford.

Date: 2019-01, Revised 2019-09
New Economics Papers: this item is included in nep-hme and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Published in Phys. Rev. E 100, 032307 (2019)

Downloads: (external link)
http://arxiv.org/pdf/1901.09629 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1901.09629

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators (help@arxiv.org).