nep-net New Economics Papers
on Network Economics
Issue of 2011‒08‒22
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Network security By Larson, Nathan
  2. Simultaneous Search and Network Efficiency By Gautier, Pieter A; Holzner, Christian
  3. Rollover risk, network structure and systemic financial crises By Kartik Anand; Prasanna Gai; Matteo Marsili
  4. A Network Model of Financial System Resilience By Kartik Anand; Prasanna Gai; Sujit Kapadia; Simon Brennan; Matthew Willison
  5. Intellectual Property Rights and South-North Formation of Global Innovation Networks By Maria Comune; Alireza Naghavi; Giovanni Prarolo
  6. On the Genesis of Multinational Foreign Affiliate Networks By Egger, Peter; Fahn, Matthias; Merlo, Valeria; Wamser, Georg
  7. Price Discrimination Through Communication By Itai Sher; Rakesh Vohra
  8. Coordination and Social Learning By Chong Huang

  1. By: Larson, Nathan
    Abstract: In a variety of settings, some payoff-relevant item spreads along a network of connected individuals. In some cases, the item will benefit those who receive it (for example, a music download, a stock tip, news about a new research funding source, etc.) while in other cases the impact may be negative (for example, viruses, both biological and electronic, financial contagion, and so on). Often, good and bad items may propagate along the same networks, so individuals must weigh the costs and benefits of being more or less connected to the network. The situation becomes more complicated (and more interesting) if individuals can also put effort into security, where security can be thought of as a screening technology that allows an individual to keep getting the benefits of network connectivity while blocking out the bad items. Drawing on the network literatures in economics, epidemiology, and applied math, we formulate a model of network security that can be used to study individual incentives to expand and secure networks and characterize properties of a symmetric equilibrium.
    Keywords: social networks; network security; network robustness; contagion; random graphs
    JEL: I18 D85 C73
    Date: 2011–08–11
  2. By: Gautier, Pieter A; Holzner, Christian
    Abstract: When workers send applications to vacancies they create a network. Frictions arise if workers do not know where other workers apply to (this affects network creation) and firms do not know which candidates other firms consider (this affects network clearing). We show that those frictions and the wage mechanism are in general not independent. Equilibria that exhibit wage dispersion are inefficient in terms of network formation. Under complete recall (firms can go back and forth between all their candidates) only wage mechanisms that allow for ex post Bertrand competition generate the maximum matching on a realized network.
    Keywords: Efficiency; network clearing; random bipartite network formation; simultaneous search
    JEL: D83 D85 E24 J64
    Date: 2011–08
  3. By: Kartik Anand; Prasanna Gai; Matteo Marsili
    Abstract: The breakdown of short-term funding markets was a key feature of the global financial crisis of 2007/8. Combining insights from the literature on global games and network growth, we develop a simple model that sheds light on how network topology interacts with the funding structure of financial institutions to determine system-wide crises. We show how the arrival of bad news about a financial institution leads others to lose confidence in it and how this, in turn, spreads across the entire interbank network. The rate of system-wide bank failure is rendered endogenous, depending crucially on both the rate at which bad news arrives and on the maturity of debt contracts. The conditions under which the financial system makes a sharp transition from a dense network of credit relations to a sparse network where credit freezes readily occur are characterized. Our results also emphasize the role of hysteresis – once broken, credit relations take a long time to re-establish as a result of common knowledge of the equilibrium. Our findings shed light on the nature of public policy responses both during and after the crisis.
    Keywords: interbank networks, credit crisis, liquidity freeze
    JEL: C72 G21
    Date: 2011–08
  4. By: Kartik Anand; Prasanna Gai; Sujit Kapadia; Simon Brennan; Matthew Willison
    Abstract: We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents – domestic banks, international financial institutions, and firms. Calibrating the model to advanced country banking sector data, we obtain sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyze how our results are influenced by firesale externalities and the feedback effects from curtailed lending in the macroeconomy. We also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices.
    Keywords: Contagion, Financial crises, Network models, Systemic risk
    JEL: C63 G21
    Date: 2011–08
  5. By: Maria Comune; Alireza Naghavi; Giovanni Prarolo
    Abstract: With the rise of the knowledge economy; delivering sound innovation policies requires a thorough understanding of how knowledge is produced and diffused. This paper takes a step to analyze a new form of globalization; the so-called system of Global Innovation Networks (GINs); to shed light on how the protection of intellectual property rights (IPRs) influences their creation and development. We focus on the role of IPR protection in fostering international innovative activities in emerging economies (South); such as China and India; and more generally; how IPRs affect the development of GINs between newly industrialized countries and OECD countries. Using both survey-based firm-level and country-level global data; we find IPRs to be an important determinant of participation in GINS from a Southern perspective. We find IPR protection at home and its harmonization across county pairs foster South-North formation of GINs. We also find that a stringent regime in the destination country discourages foreign international innovative activities that originate in NICs. Both levels of our analysis confirm the ICT industry; particularly the hardware segment; to rely on IPRs when engaging in the international outsourcing and offshoring of innovation or in patenting activities abroad.
    Keywords: Gravity Model; Information Communication Technology; Innovation; Intellectual Property Rights; International collaborations; Networks
    Date: 2011–07
  6. By: Egger, Peter; Fahn, Matthias; Merlo, Valeria; Wamser, Georg
    Abstract: Multinational enterprises (MNEs) develop their networks of foreign affiliates gradually over time. Instead of exploring all profitable opportunities immediately, they first establish themselves in their home countries and then enter new markets stepwise. We argue that this behavior is driven by uncertainty concerning a firm’s success in new markets. After entry, the firm collects information which is used to update its beliefs about its performance at a market. As conditions in different markets are correlated, the information gathered in one of them can also be used to update beliefs elsewhere – with the degree of correlation depending on issues such as the geographical or cultural distance between markets. This correlated learning may render it optimal to enter markets sequentially – an investment in market A is only followed by entry in market B if the firm was sufficiently successful in A. The prediction that firms start their expansion in markets that are closer to their home base and then proceed step by step is supported by our empirical analysis, which features the universe of foreign affiliates held by German multinationals. Based on a rich set of benchmark estimates and sensitivity checks, we identify correlated learning across markets beyond alternative explanations as a key driver of gradualism in the genesis of multinational foreign affiliate networks.
    Keywords: Firm-level data; Foreign affiliates; Learning; Location decisions; Multinational firms
    JEL: D83 D92 F23 L23
    Date: 2011–08
  7. By: Itai Sher; Rakesh Vohra
    Abstract: We study a seller's optimal mechanism for maximizing revenue when the buyer may present evidence relevant to the buyer's value, or when different types of buyer have a differential ability to communicate. We introduce a dynamic bargaining protocol in which the buyer first makes a sequence of concessions in a cheap talk phase, and then at a time determined by the seller, the buyer presents evidence to support his previous assertions, and then the seller makes a take-it-or-leave-it offer. Our main result is that the optimal mechanism can be implemented as a sequential equilibrium of our dynamic bargaining protocol. Unlike the optimal mechanism to which the seller can commit, the equilibrium of the bargaining protocol also provides incentives for the seller to behave as required. We thereby provide a natural procedure whereby the seller can optimally price discriminate on the basis of the buyer's evidence. JEL Code: C78, D82, D83.
    Keywords: price discrimination, communication, bargaining, commitment, evidence, network flows
    Date: 2011–06–01
  8. By: Chong Huang (Department of Economics, University of Pennsylvania)
    Abstract: This paper studies the interaction between coordination and social learning in a dynamic regime change game. Social learning provides public information to which players overreact due to the coordination motive. So coordination affects the aggregation of private signals through players' optimal choices. Such endogenous provision of public information results in inefficient herds with positive probability, even though private signals have an unbounded likelihood ratio property. Therefore, social learning is a source of coordination failure. An extension shows that if players could individually learn, inefficient herding disappears, and thus coordination is successful almost surely. This paper also demonstrates that along the same history, the belief convergence differs in different equilibria. Finally, social learning can lead to higher social welfare when the fundamentals are bad.
    Keywords: Coordination, social learning, inefficient herding, dynamic global game, common belief
    JEL: C72 C73 D82 D83
    Date: 2011–08–05

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