Risk Sharing and Contagion in Networks

Piero Gottardi, Fernando Vega-Redondo and Antonio Cabrales
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Fernando Vega-Redondo: Bocconi University

No 278, 2014 Meeting Papers from Society for Economic Dynamics

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.

Date: 2014
New Economics Papers: this item is included in nep-net
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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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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:278

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