nep-net New Economics Papers
on Network Economics
Issue of 2018‒01‒01
four papers chosen by
Pedro CL Souza
Pontifícia Universidade Católica do Rio de Janeiro

  1. Too Big to Jail? Key-Player Policies When the Network is Endogenous By Timo Hiller
  2. Peer effects in risky choices among adolescents By Konstanting Lucks; Melanie Lührmann; Joachim K. Winter
  3. Peer Effects and Social Influence in Post-16 Educational Choice By Stefan Speckesser; Sophie Hedges
  4. Identifying Complex Core-Periphery Structures in the Interbank Market By José Carreño; Rodrigo Cifuentes

  1. By: Timo Hiller
    Abstract: This paper endogenizes the network for the seminal model presented in Ballester et al. (2006) by way of a simple simultaneous move game. Agents choose with whom to associate and how much effort to exert. Effort levels display local strategic complementarities and global strategic substitutes. I show that all pairwise Nash equilibrium networks are nested split graphs. As in Ballester et al. (2006), agents’ equilibrium effort levels are proportional to Bonacich centrality. However, their ranking now coincides with a simpler measure, which is also easier to identify: degree centrality. I then study key player policies, which aim at minimizing aggregate effort levels via the elimination of an agent. In the spirit of network formation, after an agent was eliminated from a pairwise Nash equilibrium network, the remaining agents may revise their effort decisions and adapt their linking behavior. It is shown that, if the parameter governing global strategic substitutes is sufficiently small, then eliminating a most central agent also decreases aggregate effort levels most. This mirrors results obtained by Ballester et al. (2006). However, when global strategic substitutes are large, then, different from Ballester et al. (2006), eliminating a most central agent may not be optimal. Eliminating a most central agent, who in equilibrium also exerts highest criminal effort, decreases competition/congestion effects and increases incentives of the remaining agents to create new links. The latter effect on the aggregate level of crime may outweigh the former. These results are relevant for a wide range of applications, such as juvenile delinquency and crime, R&D expenditure of firms, bank bailouts and trade.
    Keywords: Strategic network formation, peer effects, local strategic complements, global strategic substitutes, positive externalities, negative externalities.
    JEL: D62 D85
    Date: 2017–12–20
  2. By: Konstanting Lucks (Institute for Fiscal Studies); Melanie Lührmann (Institute for Fiscal Studies and Royal Holloway, University of London); Joachim K. Winter (Institute for Fiscal Studies and Ludwig-Maximilians-Universität München)
    Abstract: We study the effects of peers on risky decision making among adolescents in the age range of 13 to 15 years. In a field experiment, we randomly allocated school classes to two social interaction treatments. Students were allowed to discuss their choices with a natural peer – either a friend or a randomly selected classmate – before individually making choices in an incentivised lottery task. In the control group, adolescents made choices without being able to discuss them with a peer. In addition, we collected information on existing peer networks. This novel design allows us to separate two channels of peer influence, assortative matching on preferences and the effect of social interaction on choices. We find that friends and classmates are matched on socio-demographic characteristics but not on risk preferences. In contrast, social interaction strongly increases the similarity of teenagers’ risky choices. A large fraction of peers align their choices perfectly.
    Keywords: peer effects; assortative matching; social interaction; risk and loss aversion
    Date: 2017–08–25
  3. By: Stefan Speckesser; Sophie Hedges
    Abstract: This paper investigates whether the educational choices that young people make after the completion of their GCSEs (at age 16) are influenced by their peers. More specifically, it takes advantage of the variation in peer groups that arises when students move from primary to secondary school in order to isolate the impact of secondary school peers on the choice of educational trajectory. These trajectories are broadly classified as academic, vocational, a combination of the two, or no education at all. In order to overcome the common problems associated with the identification of peer effects, the ability of the primary school peers of secondary school peers, who are not going to the same secondary school, is used as an instrument for secondary school peer group quality. These ‘peers of peers’ did not go to the same primary or secondary school as the individual of interest and so cannot have had any direct impact on them. Our results show that higher ability peers reduce the likelihood that an individual will choose a vocational course at age 16 after controlling for the individual’s own ability. We also find a very strong effect of household income on education choices, showing that the more deprived a student’s background is, the more likely they are to opt for a vocational trajectory over an academic one.
    Date: 2017–08
  4. By: José Carreño; Rodrigo Cifuentes
    Abstract: This paper proposes a framework to identify the structure of a financial network and its evolution of over time, and presents an application to an interbank market with complete actual data. The framework is based on a methodology popular in the social network literature, namely the Stochastic Blockmodelling (SBM), which, we argue, is more general, transparent and richer in results than other proposed methodologies. In particular, we can identify the presence of multiple cores and peripheries, as well as different ways of interaction between them. We find that such a varied coreperiphery structure exists in almost all periods for different instruments analyzed. Also, in the case of term deposits, which account for two-thirds of interbank exposures, we find that far from being static, the structure underwent a transition in the period 2009-2015, with the core increasing its size. We also show that facts revealed by our approach cannot be observed in metrics commonly used to describe networks. Finally, we describe how the elements identified by our method can be used to single out sources and channels of transmission of systemic risk in a network of banks.
    Date: 2017–12

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