nep-net New Economics Papers
on Network Economics
Issue of 2023‒04‒03
thirteen papers chosen by
Alfonso Rosa García
Universidad de Murcia

  1. Formation of Networks in a Context with Diversity By Darpö, Erik; Domínguez, Alvaro; Martín-Rodríguez, María
  2. Endogenous Production Networks with Fixed Costs By Emmanuel Dhyne; Ayumu Ken Kikkawa; Xianglong Kong; Magne Mogstad; Felix Tintelnot
  3. On the Difficulty of Characterizing Network Formation with Endogenous Behavior By Benjamin Golub; Yu-Chi Hsieh; Evan Sadler
  4. Deterministic, quenched or annealed? Differences in the parameter estimation of heterogeneous network models By Marzio Di Vece; Diego Garlaschelli; Tiziano Squartini
  5. Bank Diversity and Financial Contagion By Emmanuel Caiazzo; Alberto Zazzaro
  6. With a Little Help from My Friends? Surviving the Lockdown Using Social Networks in Rural South India By Isabelle Guérin; Christophe Jalil Nordman; Cécile Mouchel
  7. The Complexity of Debt Swapping By Henri Froese; Martin Hoefer; Lisa Wilhelmi
  8. Effort Discrimination and Curvature of Contest Technology in Conflict Networks By Xiang Sun; Jin Xu; Junjie Zhou
  9. Derivatives Risks as Costs in a One-Period Network Model By Dorinel Bastide; Stéphane Crépey; Samuel Drapeau; Mekonnen Tadese
  10. A Look at Financial Dependencies by Means of Econophysics and Financial Economics By M. Raddant; T. Di Matteo
  11. Revealing production networks from firm growth dynamics By Luca Mungo; Jos\'e Moran
  12. Complex Systems of Secrecy: The Offshore Networks of Oligarchs By Ho-Chun Herbert Chang; Brooke Harrington; Feng Fu; Daniel Rockmore
  13. The origination and distribution of money market instruments: sterling bills of exchange during the first globalization By Accominotti, Olivier; Lucena-Piquero, Delio; Ugolini, Stefano

  1. By: Darpö, Erik; Domínguez, Alvaro; Martín-Rodríguez, María
    Abstract: We present a model analyzing the endogenous network formation prior to an infinite-horizon network bargaining game. We assume agents of two types with either one of two alternatives: connections among players of the same type are cheaper than among players of different type or vice versa. In this way, players not only need to consider the trade-off between more outside options and the costs of maintaining those additional links, but also what type of players they connect to. We characterize pairwise stable network structures through necessary and sufficient conditions, highlighting the role played by the way in which heterogeneous nodes are placed in the different components for the pairwise stability of the networks. Finally, we perform a welfare analysis, comparing the efficient structures with those that are stable.
    Keywords: Bargaining, Heterogeneity, Network formation, C72, C78, D85
    Date: 2023–01
  2. By: Emmanuel Dhyne (Economics and Research Department, National Bank of Belgium); Ayumu Ken Kikkawa (University of Sauder School of Business, UBC); Xianglong Kong (University of Chicago); Magne Mogstad (University of Chicago and NBER); Felix Tintelnot (University of Chicago and NBER)
    Abstract: This paper presents a tractable model of endogenous production networks with fixed costs associated with the formation of links between firms. The model consists of a finite number of firm types producing differentiated products. Each firm is characterized by firm-specific parameters describing its CES production function, firm-specific domestic and foreign demand shifters, and a firm-specific set of potential suppliers and buyers. We consider versions of the model in which either the buyer or the supplier initiates the formation of links, and versions in which the production network can be cyclic or acyclic. Our main theoretical result is that the closed economy equilibrium is unique if the set of feasible networks consists only of networks that are acyclic and the buyer initiates the link formation while having full bargaining power in price negotiations with the supplier. We provide examples of multiple equilibria if the supplier initiates the link formation in both cyclic and acyclic feasible networks or if the buyer initiates the link formation in a cyclic production network. We take the acyclic production network model to Belgian data on firm-to-firm production networks and show that it approximates well the salient features of the network. The endogenous network model generates substantial churn in domestic firm-to-firm linkages in response to trade shocks. However, the endogenous network model generates only moderately different welfare changes compared to a model with fixed linkages, suggesting that exogenous production networks can approximate the welfare response to trade shocks reasonably well
    Keywords: production networks, endogenous formation, fixed costs
    JEL: E0 F1
    Date: 2023–03
  3. By: Benjamin Golub; Yu-Chi Hsieh; Evan Sadler
    Abstract: Bolletta (2021, Math. Soc. Sci. 114:1-10) studies a model in which a network is strategically formed and then agents play a linear best-response investment game in it. The model is motivated by an application in which people choose both their study partners and their levels of educational effort. Agents have different one-dimensional types $\unicode{x2013}$ private returns to effort. A main result claims that pairwise Nash stable networks have a locally complete structure consisting of possibly overlapping cliques: if two agents are linked, they are part of a clique composed of all agents with types between theirs. We offer a counterexample showing that the claimed characterization is incorrect, highlight where the analysis errs, and discuss implications for network formation models.
    Date: 2023–02
  4. By: Marzio Di Vece; Diego Garlaschelli; Tiziano Squartini
    Abstract: Analysing weighted networks requires modelling the binary and weighted properties simultaneously. We highlight three approaches for estimating the parameters responsible for them: econometric techniques treating topology as deterministic and statistical techniques either ensemble-averaging parameters or maximising an averaged likelihood over the topological randomness. In homogeneous networks, equivalence holds; in heterogeneous networks, the local disorder breaks it, in a way reminiscent of the difference between quenched and annealed averages in the physics of disordered systems.
    Date: 2023–03
  5. By: Emmanuel Caiazzo (Università di Napoli Federico II); Alberto Zazzaro (University of Naples Federico II, CSEF and MoFiR.)
    Abstract: This paper analyzes financial contagion in a banking system where banks are linked by interbank claims and common assets. We find that asset commonality makes banking systems more vulnerable to idiosyncratic shocks and helps to determine which interbank network structures are resistant to contagion. When the degree of commonality is homogeneous across banks, the most resilient structure is the complete interbank network in which each bank borrows evenly from all the others. However, when the bank most exposed to the defaulting bank is not the one whose portfolio is most similar to it, incomplete interbank networks are more resilient than complete. We also show that the degree and variability of asset commonality between banks and the way this intertwines with the cross-holdings of interbank deposits have important implications for macroprudential regulation.
    Keywords: Banking crisis; financial contagion; interbank network; asset commonality.
    JEL: G01 G21 G28
    Date: 2023–02–13
  6. By: Isabelle Guérin (IRD, CESSMA (Paris, France), IFP (Pondicherry, India)); Christophe Jalil Nordman (IRD, UMR LEDa, DIAL, PSL, Université Paris Dauphine, IFP (Pondicherry, India)); Cécile Mouchel (Université Paris Diderot, CESSMA (Social Science Center Studies in African, American and Asian Worlds), DIAL)
    Abstract: How have rural populations in India mobilized their social networks in times of forced "social distancing"? Focusing on a rural region in Tamil Nadu, mixing Social Network Analysis, descriptive statistics and qualitative interviews conducted before the lockdown, during the lockdown and its aftermath, this paper shows that kinship ties and caste-based relationships are still used as inescapable economic resources, especially when it comes to surviving in this unprecedented worldwide economic and social crisis. The region under study has undergone profound changes in recent decades, combining the disappearance of agrarian forms of dependency and the strengthening of intra-caste interdependence among the lower-caste group (measured here in terms of homophily and homogeneity) with a focus on access to credit and selfhelp to access employment. The crisis is putting these social networks to the test. Subsidized food, the main pro-poor measure of the Indian government, prevented famine, even if it did not prevent severe malnutrition. Although kin and caste solidarity played a key role in helping households survive, they did not prevent the resurgence of old forms of patronage.
    Keywords: social networks, homophily, name generators, India, lockdown, caste, employment, debt, kinship
    JEL: D85 J15 Q12
    Date: 2023–03
  7. By: Henri Froese; Martin Hoefer; Lisa Wilhelmi
    Abstract: A debt swap is an elementary edge swap in a directed, weighted graph, where two edges with the same weight swap their targets. Debt swaps are a natural and appealing operation in financial networks, in which nodes are banks and edges represent debt contracts. They can improve the clearing payments and the stability of these networks. However, their algorithmic properties are not well-understood. We analyze the computational complexity of debt swapping in networks with ranking-based clearing. Our main interest lies in semi-positive swaps, in which no creditor strictly suffers and at least one strictly profits. These swaps lead to a Pareto-improvement in the entire network. We consider network optimization via sequences of $v$-improving debt swaps from which a given bank $v$ strictly profits. We show that every sequence of semi-positive $v$-improving swaps has polynomial length. In contrast, for arbitrary $v$-improving swaps, the problem of reaching a network configuration that allows no further swaps is PLS-complete. We identify cases in which short sequences of semi-positive swaps exist even without the $v$-improving property. In addition, we study reachability problems, i.e., deciding if a sequence of swaps exists between given initial and final networks. We identify a polynomial-time algorithm for arbitrary swaps, show NP-hardness for semi-positive swaps and even PSPACE-completeness for $v$-improving swaps or swaps that only maintain a lower bound on the assets of a given bank $v$. A variety of our results can be extended to arbitrary monotone clearing.
    Date: 2023–02
  8. By: Xiang Sun; Jin Xu; Junjie Zhou
    Abstract: In a model of interconnected conflicts on a network among multiple contestants, we compare the equilibrium effort profiles and payoffs under both two scenarios: uniform effort (UE) in which each contestant is restricted to exert the same effort across all the battles she participates, and discriminatory effort (DE) in which such a restriction is lifted. When the contest technology in each battle is of Tullock form, a surprising neutrality result holds within the class of semi-symmetric conflict network structures: both the aggregate actions and equilibrium payoffs under two regimes are the same. We also show that, in some sense, the Tullock form is necessary for such a neutrality result. Moving beyond the Tullock family, we further demonstrate how the curvature of contest technology shapes the welfare and effort effects. Connection to the literature on price discrimination is also discussed.
    Date: 2023–02
  9. By: Dorinel Bastide; Stéphane Crépey (UPCité - UFR Mathématiques - Université Paris Cité - UFR Mathématiques [Sciences] - UPCité - Université Paris Cité); Samuel Drapeau; Mekonnen Tadese
    Abstract: We present a one-period XVA model encompassing bilateral and centrally cleared trading in a unified framework with explicit formulas for most quantities at hand. We illustrate possible uses of this framework for running stress test exercises on a financial network from a clearing member's perspective or for optimizing the porting of the portfolio of a defaulted clearing member.
    Date: 2022
  10. By: M. Raddant; T. Di Matteo
    Abstract: This is a review about financial dependencies which merges efforts in econophysics and financial economics during the last few years. We focus on the most relevant contributions to the analysis of asset markets' dependencies, especially correlational studies, which in our opinion are beneficial for researchers in both fields. In econophysics, these dependencies can be modeled to describe financial markets as evolving complex networks. In particular we show that a useful way to describe dependencies is by means of information filtering networks that are able to retrieve relevant and meaningful information in complex financial data sets. In financial economics these dependencies can describe asset comovement and spill-overs. In particular, several models are presented that show how network and factor model approaches are related to modeling of multivariate volatility and asset returns respectively. Finally, we sketch out how these studies can inspire future research and how they contribute to support researchers in both fields to find a better and a stronger common language.
    Date: 2023–02
  11. By: Luca Mungo; Jos\'e Moran
    Abstract: We study the correlation structure of firm growth rates. We show that most firms are correlated because of their exposure to a common factor but that firms linked through the supply chain exhibit a stronger correlation on average than firms that are not. Removing this common factor significantly reduces the average correlation between two firms with no relationship in the supply chain while maintaining a significant correlation between two firms that are linked. We then demonstrate how this observation can be used to reconstruct the topology of a supply chain network using Gaussian Markov Models.
    Date: 2023–02
  12. By: Ho-Chun Herbert Chang; Brooke Harrington; Feng Fu; Daniel Rockmore
    Abstract: Following the invasion of Ukraine, the US, UK, and EU governments--among others--sanctioned oligarchs close to Putin. This approach has come under scrutiny, as evidence has emerged of the oligarchs' successful evasion of these punishments. To address this problem, we analyze the role of an overlooked but highly influential group: the secretive professional intermediaries who create and administer the oligarchs' offshore financial empires. Drawing on the Offshore Leaks Database provided by the International Consortium of Investigative Journalists (ICIJ), we examine the ties linking offshore expert advisors (lawyers, accountants, and other wealth management professionals) to ultra-high-net-worth individuals from four countries: Russia, China, the United States, and Hong Kong. We find that resulting nation-level "oligarch networks" share a scale-free structure characterized by heterogeneity of heavy-tailed degree distributions of wealth managers; however, network topologies diverge across clients from democratic versus autocratic regimes. While generally robust, scale-free networks are fragile when targeted by attacks on highly-connected nodes. Our "knock-out" experiments pinpoint this vulnerability to the small group of wealth managers themselves, suggesting that sanctioning these professional intermediaries may be more effective and efficient in disrupting dark finance flows than sanctions on their wealthy clients. This vulnerability is especially pronounced amongst Russian oligarchs, who concentrate their offshore business in a handful of boutique wealth management firms. The distinctive patterns we identify suggest a new approach to sanctions, focused on expert intermediaries to disrupt the finances and alliances of their wealthy clients. More generally, our research contributes to the larger body of work on complexity science and the structures of secrecy.
    Date: 2023–03
  13. By: Accominotti, Olivier; Lucena-Piquero, Delio; Ugolini, Stefano
    Abstract: This article presents a detailed analysis of how liquid money market instruments—sterling bills of exchange—were produced during the first globalization. We rely on a unique dataset that reports systematic information on all 23, 493 bills re‐discounted by the Bank of England in the year 1906. Using descriptive statistics and network analysis, we reconstruct the complete network of linkages between agents involved in the origination and distribution of these bills. Our analysis reveals the truly global nature of the London bill market before the First World War and underscores the crucial role played by London intermediaries (acceptors and discounters) in overcoming information asymmetries between borrowers and lenders on this market. The complex industrial organization of the London money market ensured that risky private debts could be transformed into extremely liquid and safe monetary instruments traded throughout the global financial system.
    Keywords: money market; industrial organisation; information asymmetry; bill of exchange
    JEL: E42 G23 L14 N20
    Date: 2021–11–01

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