nep-net New Economics Papers
on Network Economics
Issue of 2018‒02‒26
four papers chosen by
Pedro CL Souza
Pontifícia Universidade Católica do Rio de Janeiro

  1. Collateral Unchained: Rehypothecation Networks, Concentration and Systemic Effects By Duc Thi Luu; Mauro Napoletano; Paolo Barucca; Stefano Battiston
  2. Efficient Partnership Formation In Networks By Bloch, Francis; Dutta, Bhaskar; Manea, Mihai
  3. Strategic Default in Financial Networks By Nizar Allouch; Maya Jalloul
  4. Monitoring and punishment networks in a common-pool resource dilemma: experimental evidence By Ganga Shreedhar, Alessandro Tavoni, Carmen Marchiori

  1. By: Duc Thi Luu (University of Kiel, Germany); Mauro Napoletano (OFCE Sciences-Po; SKEMA Business School); Paolo Barucca (University of Zurich, Switzerland; Scuola Superiore Sant'Anna, Pisa (Italy)); Stefano Battiston (University of Zurich, Switzerland)
    Abstract: We study how network structure affects the dynamics of collateral in presence of rehypothecation. We build a simple model wherein banks interact via chains of repo contracts and use their proprietary collateral or re-use the collateral obtained by other banks via reverse repos. In this framework, we show that total collateral volume and its velocity are affected by characteristics of the network like the length of rehypothecation chains, the presence or not of chains having a cyclic structure, the direction of collateral flows, the density of the network. In addition, we show that structures where collateral flows are concentrated among few nodes (like in core-periphery networks) allow large increases in collateral volumes already with small network density. Furthermore, we introduce in the model collateral hoarding rates determined according to a Value-at-Risk (VaR) criterion, and we then study the emergence of collateral hoarding cascades in different networks. Our results highlight that network structures with highly concentrated collateral flows are also more exposed to large collateral hoarding cascades following local shocks. These networks are therefore characterized by a trade-off between liquidity and systemic risk.
    Keywords: Rehypothecation, Collateral, Repo Contracts, Networks, Liquidity, Collateral-Hoarding Effects, Systemic Risk
    JEL: G01 G11 G32 G33
    Date: 2018–02
  2. By: Bloch, Francis (Université Paris 1 and Paris School of Economics); Dutta, Bhaskar (University of Warwick and Ashoka University); Manea, Mihai (Stanford University)
    Abstract: We analyze the formation of partnerships in social networks. Players need favors at random times and ask their neighbors in the network to form exclusive long-term partnerships that guarantee reciprocal favor exchange. Refusing to provide a favor results in the automatic removal of the underlying link. When favors are costly, players agree to provide the first favor in a partnership only if they otherwise face the risk of eventual solitude. In equilibrium, the players essential for realizing every maximum matching can avoid this risk and enjoy higher payoffs than inessential players. Although the search for partners is decentralized and reflects local incentives, the strength of essential players drives efficient partnership formation in every network. When favors are costless, players enter partnerships at any opportunity and every maximal matching can emerge in equilibrium. In this case, efficiency is limited to special linking patterns : complete and complete bipartite networks, locally balanced bipartite networks with positive surplus, and factor-critical networks.
    Keywords: networks, ; partnerships, matchings ; efficiency ; decentralized markets ; favor exchange ; completely elementary networks ; locally balanced networks
    JEL: D85 C78
    Date: 2018
  3. By: Nizar Allouch (University of Kent); Maya Jalloul (Queen Mary University of London)
    Abstract: This paper investigates a model of strategic interactions in financial networks, where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Next, we develop an algorithm to find all Nash equilibria that relies on the financial network structure. Finally, we explore some policy implications to achieve efficient coordination.
    Keywords: Systemic risk, default, financial networks, coordination games, central clearing, counterparty, financial regulation
    JEL: C72 D53 D85 G21 G28 G33
    Date: 2018–02–06
  4. By: Ganga Shreedhar, Alessandro Tavoni, Carmen Marchiori
    Abstract: In an experimental study, we explore how imperfect monitoring and punishment network architectures impacts cooperation, punishment and beliefs, in a non-linear common pool resource appropriation dilemma. We find that complete networks (with perfect monitoring and punishment), are the least efficient due to higher punishment, relative to incomplete networks. In addition, high appropriators are sanctioned in all networks, but well-connected and undirected networks elicit higher anti-social punishment. Lastly, although subject’s underestimate other’s appropriation in all networks, the difference between beliefs and other’s appropriation declines with time. This decline occurs faster in complete networks, relative to incomplete but connected networks.
    Date: 2018–01

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