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on Network Economics |
| By: | Antonio Cabrales; Piero Gottardi; Fernando Vega-Redondo |
| Abstract: | The aim of this paper is to investigate how the capacity of an economic system to absorb shocks depends on the specific pattern of interconnections established among financial firms. The key trade-off at work is between the risk-sharing gains enjoyed by firms when they become more interconnected and the large-scale costs resulting from an increased risk exposure. We focus on two dimensions of the network structure: the size of the (disjoint) components into which the network is divided, and the “relative density" of connections within each component. We find that when the distribution of the shocks displays "fat" tails extreme segmentation is optimal, while minimal segmentation and high density are optimal when the distribution exhibits "thin" tails. For other, less regular distributions intermediate degrees of segmentation and sparser connections are also optimal. We also find that there is typically a conflict between efficiency and pairwise stability, due to a “size externality" that is not internalized by firms who belong to components that have reached an individually optimal size. Finally, optimality requires perfect assortativity for firms in a component. |
| Keywords: | Firm networks, Contagion, Risk Sharing |
| JEL: | D85 C72 G21 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we1301&r=net |
| By: | Senay Sokullu |
| Abstract: | This paper considers an empirical semiparametric model for two-sided markets. Contrary to existing empirical literature on two-sided markets, we do not rely on linear network effects. Instead, network effects and probability distribution functions of net benefits of two sides are specified nonparametrically. The demand functions and the network effect functions of readers and advertisers are estimated by nonparametric IV estimation using a data set from German magazine industry. The ill-posed inverse problem faced during the estimation is solved by Tikhonov Regularization. We show that semiparametric specification is supported by the data and the network effects on readers' side are neither linear nor monotonic. With a numerical illustration we demonstrate that the mark-up of the magazine on readers' side is 27% higher with the nonlinearly specified network effects than in the case with linear network effects. |
| Keywords: | Two-sided markets, Network externality, Nonparametric IV, Ill-posed inverse problems, Tikhonov Regularization |
| JEL: | C14 C30 L14 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:12/628&r=net |
| By: | Nikolaus Hautsch; Julia Schaumburg; Melanie Schienle; |
| Abstract: | We propose a methodology for forecasting the systemic impact of financial institutions in interconnected systems. Utilizing a five-year sample including the 2008/9 financial crisis, we demonstrate how the approach can be used for timely systemic risk monitoring of large European banks and insurance companies. We predict firms’ systemic relevance as the marginal impact of individual downside risks on systemic distress. The so-called systemic risk betas account for a company’s position within the network of financial interdependencies in addition to its balance sheet characteristics and its exposure towards general market conditions. Relying only on publicly available daily market data, we determine time-varying systemic risk networks, and forecast systemic relevance on a quarterly basis. Our empirical findings reveal time-varying risk channels and firms’ specific roles as risk transmitters and/or risk recipients. |
| Keywords: | Forecasting systemic risk contributions, time-varying systemic risk network, model selection with regularization in quantiles |
| JEL: | G01 G18 G32 G38 C21 C51 C63 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2013-008&r=net |
| By: | Timo Hiller |
| Abstract: | This paper presents a simple model of strategic network formation with local com- plementarities in effort levels and positive local externalities. Equilibrium networks display - other than the complete and the empty network - a core-periphery structure, which is commonly observed in empirical studies. Ex-ante homogenous agents may obtain very different ex-post outcomes. These findings are relevant for a wide range of social and economic phenomena, such as educational attainment, criminal activity, labor market participation and R&D expenditures of rms. |
| Keywords: | Network formation, peer effects, strategic complements, positive externalities |
| JEL: | D62 D85 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:12/633&r=net |
| By: | Timo Hiller |
| Abstract: | I propose a game of signed network formation, where agents make friends to coerce payoffs from enemies with fewer friends. The model accounts for the interplay between friendship and enmity. Nash equilibrium configurations are such that, either everyone is friends with everyone, or agents can be partitioned into sets of different size, where agents within the same set are friends and agents in different sets are enemies. These results mirror findings of a large body of work on signed networks in sociology, social psychology, international relations and applied physics. |
| Keywords: | Network Formation, Structural Balance, Alliances, Contest Success Function |
| JEL: | D74 D85 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:bri:uobdis:12/629&r=net |
| By: | Omar McDoom (London School of Economics) |
| Abstract: | Although popularly perceived as a positive force, social capital may also produce socially undesirable outcomes. Drawing on Rwanda’s 1994 genocide, this article shows that participation in its violence was partly determined by the features of individuals’ social networks. Perpetrators possessed larger networks in general and more connections to other perpetrators in particular. The quality as well as quantity of connections also mattered. Strong ties generally, and kinship and neighborly ties specifically, were strong predictors of participation. In contrast, possession of countervailing ties to nonparticipants was not significant. In explaining these findings, I suggest participants’ networks fulfilled functions of information diffusion, social influence, and behavioral regulation. The findings point to the importance of social structure and suggest that relational data should complement individual attribute data in predicting participation in collective violence. |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:hic:wpaper:140&r=net |