nep-net New Economics Papers
on Network Economics
Issue of 2018‒08‒20
seven papers chosen by
Pedro CL Souza
Pontifícia Universidade Católica do Rio de Janeiro

  1. Insider networks By Erol, Selman; Lee, Michael Junho
  2. The emergence of inequality in social groups: network structure and institutions affect the distribution of earnings in cooperation games By Tsvetkova, Milena; Wagner, Claudia; Mao, Andrew
  3. Vertical Mergers in Platform Markets By Jérôme Pouyet; Thomas Trégouët
  4. Unbundling Macroeconomics via Heterogeneous Agents and Input-Output Networks By David Rezza Baqaee; Emmanuel Farhi
  5. Interconnectedness, Firm Resilience and Monetary Policy By Thiago Christiano Silva; Solange Maria Guerra; Michel Alexandre da Silva; Benjamin Miranda Tabak
  6. Regime Change in Large Information Networks By Joan de Martí; Pau Milán
  7. Branch Network Structure and Lending Behaviour By Tho Pham; Oleksandr Talavera; Andriy Tsapin

  1. By: Erol, Selman (Carnegie Mellon University); Lee, Michael Junho (Federal Reserve Bank of New York)
    Abstract: This paper develops a model to study the formation and regulation of information transmission networks. We analyze a cat and mouse game between a regulator, who sets and enforces a regulatory environment, and agents, who form networks to disseminate and share insider information. For any given regulatory environment, agents adapt by forming networks that are sufficiently complex to circumvent prosecution by regulators. We show that regulatory ambiguity arises as an equilibrium phenomenon—regulators deliberately set broad regulatory boundaries in order to avoid explicit gaming by agents. As a response, we show that agents form a core-periphery network, with core members acting as conduits of information on behalf of their stakeholders, effectively intermediating all transmissions of information within the network.
    Keywords: network formation; insider trading; regulatory ambiguity; endogenous intermediation
    JEL: D85 G14 G20
    Date: 2018–08–01
  2. By: Tsvetkova, Milena; Wagner, Claudia; Mao, Andrew
    Abstract: From small communities to entire nations and society at large, inequality in wealth, social status, and power is one of the most pervasive and tenacious features of the social world. What causes inequality to emerge and persist? In this study, we investigate how the structure and rules of our interactions can increase inequality in social groups. Specifically, we look into the effects of four structural conditions—network structure, network fluidity, reputation tracking, and punishment institutions—on the distribution of earnings in network cooperation games. We analyze 33 experiments comprising 96 experimental conditions altogether. We find that there is more inequality in clustered networks compared to random networks, in fixed networks compared to randomly rewired and strategically updated networks, and in groups with punishment institutions compared to groups without. Secondary analyses suggest that the reasons inequality emerges under these conditions may have to do with the fact that fixed networks allow exploitation of the poor by the wealthy and clustered networks foster segregation between the poor and the wealthy, while the burden of costly punishment falls onto the poor, leaving them poorer. Surprisingly, we do not find evidence that inequality is affected by reputation in a systematic way but this could be because reputation needs to play out in a particular network environment in order to have an effect. Overall, our findings suggest possible strategies and interventions to decrease inequality and mitigate its negative impact, particularly in the context of mid- and large-sized organizations and online communities.
    JEL: J1
    Date: 2018–07–20
  3. By: Jérôme Pouyet (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Thomas Trégouët (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We analyze the competitive impact of vertical integration between a platform and a manufacturer when platforms provide operating systems for devices sold by manufacturers to customers, and, customers care about the applications developed for the operating systems. Two-sided network effects between customers and developers create strategic substitutability between manufacturers' prices. When it brings efficiency gains, vertical integration increases consumer surplus, is not profitable when network effects are strong, and, benefits the non-integrated manufacturer. When developers bear a cost to make their applications available on a platform, manufacturers boost the participation of developers by affiliating with the same platform. This creates some market power for the integrated firm and vertical integration then harms consumers, is always profitable, and, leads to foreclosure. Introducing developer fees highlights that not only the level, but also the structure of indirect network effects matter for the competitive analysis.
    Keywords: network effects,Vertical integration,two-sided markets
    Date: 2016–12
  4. By: David Rezza Baqaee; Emmanuel Farhi
    Abstract: The goal of this paper is to simultaneously unbundle two interacting reduced-form building blocks of traditional macroeconomic models: the representative agent and the aggregate production function. We introduce a broad class of disaggregated general equilibrium models with Heterogeneous Agents and Input-Output networks (HA-IO). We elucidate their properties through two sets of results describing the propagation and aggregation of shocks. First, we characterize how shocks affect prices and quantities of goods and factors. Even with purely microeconomic shocks, the mapping from structural primitives to observed effects is complicated by “local” general equilibrium forces. Our framework shows how to account for these forces, and helps interpret IV-based cross-sectional regression results. We also uncover a surprising property of a large class of efficient representative agent models: they feature symmetric propagation in that a shock to producer i affects the sales of producer j in exactly the same way that a shock to j affects the sales of i. This improbable symmetry breaks in the presence of heterogeneous agents or distortions. Second, we provide aggregation results characterizing the responses of industry-level variables such as markups and productivity. The behavior of these aggregates is particularly delicate in inefficient economies: they respond to microeconomic shocks outside of the industry; and they can give rise to fallacies of composition whereby aggregates move in the opposite direction of their microeconomic counterparts. Our results shed light on many seemingly disparate applied questions, such as: sectoral co-movement in business cycles; factor-biased technical change in task-based models; structural transformation; the effects of corporate taxation; and the dependence of fiscal multipliers on the composition of government spending.
    JEL: E23 E3
    Date: 2018–06
  5. By: Thiago Christiano Silva; Solange Maria Guerra; Michel Alexandre da Silva; Benjamin Miranda Tabak
    Abstract: We develop a novel approach to understand how central bank policy rates affect individual firms and banks and how aspects of interconnectedness accentuate these effects in nontrivial ways. Changes in policy rate impact – either direct or indirectly – these agents, depending on their balance-sheet composition and network relationships. Interest rate shocks change bank capital on spot, which in turn reflects on how banks issue credit to firms. Firms experience increasing financial costs that revert to banks in the form of credit defaults, exacerbating the aftereffects of the monetary policy change. We apply the model to a unique data set from Brazil and find nonlinear and asymmetric effects on firms and banks that depend on the magnitude and direction of policy rate changes. The effects of interest rate changes are distinct in environments of expansion and recession. Finally, we find that monetary policy can have linear and nonlinear implications for financial stability, depending on the magnitude of the interest rate shock and network relationship patterns. Particularly, we show that big swings in the interest rate can cause undesirable nonlinear consequences to the financial stability
    Date: 2018–07
  6. By: Joan de Martí; Pau Milán
    Abstract: We study global games of regime change within networks of truthful communication. Agents can choose between attacking and not attacking a status quo, whose strength is unknown. Players share private signals on this state of the world with their immediate neighbors. Communication with neighboring players introduces local correlations in posterior beliefs and also allows for the pooling of information. In order to isolate the latter effect, we provide, as a methodological contribution, sparseness conditions on networks that allow for asymptotic approximations that eliminate covariances from equilibrium strategies. We ask how changes in the distribution of connectivities in the population affect the types of coordination in equilibrium as well as the likelihood of successful rally. We find that without a public signal strategic incentives align, and the probability of success remains independent of the type of network. With a public signal the distribution of degrees unambiguously affects the probability of success, although the direction of change is not monotone, and depends crucially on the cost of attack.
    Date: 2018–07
  7. By: Tho Pham (School of Management, Swansea University); Oleksandr Talavera (School of Management, Swansea University); Andriy Tsapin (National Bank of Ukraine; National University of Ostroh Academy)
    Abstract: This paper examines the link between branch network structure and bank lending. The unique dataset allows us to differentiate the structures of contact points which do not have decision-making authority and delegated branches which can affect loan decisions. We find that a large and dispersed network of contact points can help increase credit supply and mitigate risks through diversification. Further, banks benefit from information advantage brought by the dispersion of delegated branches. However, longer distance between headquarters and local delegations can also amplify agency problems, which outweigh the benefits. Our findings suggest that the optimal structure could be the centralized network of delegated branches combined with the diversified access point network.
    Keywords: consolidation, centralization, decision-making, risk management, lending, access points, delegated branches
    JEL: G01 G21
    Date: 2018–08

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