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on Network Economics |
| By: | Hamed Amini; Rama Cont; Andreea Minca |
| Abstract: | Propagation of balance-sheet or cash-flow insolvency across financial institutions may be modeled as a cascade process on a network representing their mutual exposures. We derive rigorous asymptotic results for the magnitude of contagion in a large financial network and give an analytical expression for the asymptotic fraction of defaults, in terms of network characteristics. Our results extend previous studies on contagion in random graphs to inhomogeneous directed graphs with a given degree sequence and arbitrary distribution of weights. We introduce a criterion for the resilience of a large financial network to the insolvency of a small group of financial institutions and quantify how contagion amplifies small shocks to the network. Our results emphasize the role played by "contagious links" and show that institutions which contribute most to network instability in case of default have both large connectivity and a large fraction of contagious links. The asymptotic results show good agreement with simulations for networks with realistic sizes. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1112.5687&r=net |
| By: | Alessandro Spelta; Tanya Ara\'ujo |
| Abstract: | The recent financial crisis has stressed the need to understand financial systems as networks of interdependent countries, where cross-border financial linkages play the fundamental role. It has also been emphasized that the relevance of these networks relies on the representation of changes follow-on the occurrence of stress events. Adopting a topological approach we are able to address the role that network structures play in the spread of shocks and conversely, the effectiveness of stress events and its impact on the structure of the networks. Here, from series of interbank liabilities and claims over different time periods, we have developed networks of positions (net claims) between countries. Besides the Minimal Spanning Tree analysis of the time-constrained networks, a coefficient of residuality is defined to capture the structural evolution of the network of cross-border financial linkages. Because some structural changes seem to be related to the role that countries play in the financial context, networks of debtor and creditor countries are also developed. Empirical results allows to relate the network structure that emerges in the last years to the globally turbulent period that has characterized financial systems since the latest nineties. The residuality coefficient highlights an important modification acting in the financial linkages across countries in the period 1997-2011, and situates the recent financial crises as replica of a larger structural change going on since 1997. |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1112.5711&r=net |
| By: | Kato, Takao (Colgate University); Shu, Pian (MIT) |
| Abstract: | Using data on team assignment and weekly output for all weavers in an urban Chinese textile firm between April 2003 and March 2004, this paper studies a) how randomly assigned teammates affect an individual worker's behavior under a tournament-style incentive scheme, and b) how such effects interact with exogenously formed social networks in the manufacturing workplace. First, we find that a worker's performance improves when the average ability of her teammates increases. Second, we exploit the exogenous variations in workers' origins in the presence of the well-documented social divide between urban resident workers and rural migrant workers in large urban Chinese firms, and show that the coworker effects are only present if the teammates are of a different origin. In other words, workers do not act on pecuniary incentives to outperform teammates who are from the same social network. Our results point to the important role of group identities in overcoming self-interests and facilitating altruistic behavior. |
| Keywords: | coworker effects in the workplace, social networks, intergroup competition |
| JEL: | M5 J24 L2 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6219&r=net |
| By: | Wilko Bolt; Sujit Chakravorti |
| Abstract: | The provision of retail payment services is complex with many participants engaging in a series of interrelated bilateral transactions and subject to large economies of scale and scope along with strong adoption, usage and network externalities. This makes sound public policy difficult. We focus on three types of market interventions for various countries. We argue that intervention into payment markets should concentrate on the removal of entry barriers in payment markets and providing greater incentives to adopt efficient payment instruments without stifling private sector investment in more efficient payment technologies over the long term. While the theoretical literature on the economics of payment cards is growing, the empirical literature is yet too limited to provide much guidance to public authorities. Eventually, the outcomes from different types of market interventions will provide a useful “natural experiment” to refute or validate the various theories of the economics of payments. |
| Keywords: | Retail payments; market interventions; pricing; public policy |
| JEL: | L11 G21 D53 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:331&r=net |
| By: | Wilko Bolt; Elizabeth Foote; Heiko Schmiedel |
| Abstract: | We consider debit and credit card networks. Our contribution is to introduce the role of consumer credit into these payment networks, and to assess the way this affects competition and equilibrium fees. We analyze a situation in which overdrafts are associated with current accounts and debit cards, and larger credit lines with ‘grace’ periods are associated with credit cards. If we just introduce credit cards, we find their merchant fees depend not only on the networks’ cost of funds and the probability of default, but also on the interest rates of overdrafts. Whilst debit card merchant fees do not depend on funding costs or default risk in a debit-card only world, this changes when they start to compete with credit cards. First, debit merchant acceptance increases with the default probability, even though merchant fees increase. Second, an increase in funding costs causes a surprising increase in debit merchant fees. Effectively, the bank offering the debit card benefits from consumers maintaining a positive current account balance, when they use their credit instead of their debit card. As a result, this complementarity may lead to relatively high debit card merchant fees as the bank discourages debit card acceptance at the margin. |
| Keywords: | Payment pricing; Card competition; Consumer credit; Complementarity |
| JEL: | L11 G21 D53 |
| Date: | 2011–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:332&r=net |