Risk-Sharing and Contagion in Networks

Antonio Cabrales, Piero Gottardi and Fernando Vega-Redondo

No 4715, CESifo Working Paper Series from CESifo

Abstract: We investigate the trade-off between the risk-sharing gains enjoyed by more interconnected firms and the costs resulting from an increased risk exposure. We find that when the shock distribution displays “fat” tails, extreme segmentation into small components is optimal, while minimal segmentation and high density of connections are optimal when the distribution exhibits “thin” tails. For less regular distributions, intermediate degrees of segmentation and sparser connections are optimal. Also, if firms are heterogeneous, optimality requires perfect assortativity in a component. In general, however, a conflict arises between efficiency and pairwise stability, due to a “size externality” not internalized by firms.

Keywords: firm networks; contagion; risk sharing (search for similar items in EconPapers)
JEL-codes: C72 D85 G21 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Related works:
Journal Article: Risk Sharing and Contagion in Networks (2017)
Working Paper: Risk-sharing and contagion in networks (2014)
Working Paper: Risk Sharing and Contagion in Networks (2014)
Working Paper: Risk-sharing and contagion in networks (2013)
Working Paper: Risk-Sharing and Contagion in Networks (2013)
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