nep-net New Economics Papers
on Network Economics
Issue of 2013‒12‒29
five papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Optimal Sales Schemes for Network Goods By Alexei Parakhonyak; Nick Vikander
  2. A Theoretical Analysis of the Role of Social Networks in Entrepreneurship By Leyden, Dennis P.; Link, Albert N.; Siegel, Donald S.
  3. Modular scale-free architecture of Colombian financial networks: Evidence and challenges with financial stability in view By carlos León; Ron J. Berndsen
  4. Interdependent Utility and Truthtelling in Two-Sided Matching By Xiao Yu Wang
  5. The Two Faces of Interbank Correlation By Schaeck, K.; Silva Buston, C.F.; Wagner, W.B.

  1. By: Alexei Parakhonyak (National Research University Higher School of Economics); Nick Vikander (Department of Economics, Copenhagen University)
    Abstract: This paper examines the optimal sequencing of sales in the presence of network externalities. A firm sells a good to a group of consumers whose payoff from buying is increasing in total quantity sold. The firm selects the order to serve consumers so as to maximize expected sales. It can serve all consumers simultaneously, serve them all sequentially, or employ any intermediate scheme. We show that the optimal sales scheme is purely sequential, where each consumer observes all previous sales before choosing whether to buy himself. A sequential scheme maximizes the amount of information available to consumers, allowing success to breed success. Failure can also breed failure, but this is made less likely by consumers’ desire to influence one another’s behavior. We show that when consumers differ in the weight they place on the network externality, the firm would like to serve consumers with lower weights first. Our results suggests that a firm launching a new product should first target independent-minded consumers who can serve as opinion leaders for those who follow.
    Keywords: Product launch, Network externality, Sequencing of sales
    JEL: M31 D42 D82 L12
    Date: 2013–11–01
  2. By: Leyden, Dennis P. (University of North Carolina at Greensboro, Department of Economics); Link, Albert N. (University of North Carolina at Greensboro, Department of Economics); Siegel, Donald S. (University at Albany, SUNY)
    Abstract: Entrepreneurship involves innovation and uncertainty. We outline a theory of entrepreneurship, which highlights the importance of social networks in promoting innovation and reducing uncertainty. Our findings suggest that this “social” aspect of entrepreneurship increases the probability of entrepreneurial success. The results also lend credence to theories of entrepreneurship that suggest that entrepreneurial opportunities are formed endogenously by the entrepreneurs who create them. We also consider the public policy implications of our findings.
    Keywords: Entrepreneurship; Social networks; Innovation; Technology
    JEL: O31 O32 O33 O38 Z13
    Date: 2013–12–17
  3. By: carlos León; Ron J. Berndsen
    Abstract: Scale-free (inhomogeneous) connective structures with modular (highly clustered) hierarchies are ubiquitous in real–world networks. Evidence from the main Colombian payment and settlement systems verifies that local financial networks have self-organized into a modular scale-free architecture that favors everyday robustness and performance in exchange for rare episodes of fragility but rapid evolution. Results provide new elements for understanding and modeling the formation and structure of financial networks, and suggest new insights and challenges for authorities contributing to their stability. For instance, (i) the observed architecture suggests that financial systems are complex adaptive systems; (ii) complex adaptive features invalidate traditional reductionist assumptions for modeling financial systems (e.g. homogeneity, normality, static equilibrium, linearity); (iii) the observed modular scale-free architecture tends to limit cascades and isolate feedbacks; and (iv) with financial stability in view, authorities should understand and take advantage of the existing architecture by means of designing and implementing macro-prudential regulation and system-calibrated requirements. Yet, the quest for discovering, explaining and handling the emerging structure of financial systems is an enduring task.
    Keywords: networks, complex adaptive systems, self-organization, financial system, scale-free, financial stability Classification JEL: D85, E42, C38, D53, G20, L14
    Date: 2013–12
  4. By: Xiao Yu Wang
    Abstract: Mechanisms which implement stable matchings are often observed to work well in practice, even in environments where the stable outcome is not unique, information is complete, and the number of players is small. Why might individuals refrain from strategic manipulation, even when the complexity cost of manipulation is low? I study a two-sided, one-to-one matching problem with no side transfers, where utility is interdependent in the following intuitive sense: an individual's utility from a match depends not only on her preference ranking of her assigned partner, but also on that partner's ranking of her. I show that, in a world of complete information and linear interdependence, a unique stable matching emerges, and is attained by a modified Gale-Shapley deferred acceptance algorithm. As a result, a stable rule supports truth-telling as an equilibrium strategy. Hence, these results offer a new intuition for why stable matching mechanisms seem to work well in practice, despite their theoretic manipulability: individuals may value being liked.
    Keywords: two-sided matching, interdependent utility, stability
    JEL: C78 D82
    Date: 2013
  5. By: Schaeck, K.; Silva Buston, C.F.; Wagner, W.B. (Tilburg University, Center for Economic Research)
    Abstract: Abstract: We decompose the correlation of bank stock returns into a systemic risk component and a component arising from diversi cation activities. Estimation for U.S. Bank Holding Companies (BHCs) shows the diversification component to be large and positively related to BHC performance during the crisis of 2007-2009. This suggests that it is important to distinguish between the two sources of interbank correlations when quantifying systemic risk at banks. Our decomposition also permits us to estimate the marginal gains from diversfication, which turn out to be rapidly declining with bank size. Since large banks are additionally found to display high levels of the systemic risk component, they are hence predominantly exposed to the undesirable source of interbank correlation.
    Keywords: systemic risk;interbank correlation;diversification
    Date: 2013

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