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on Network Economics |
| By: | Ying Chen (University of Nottingham Ningbo China); Tom Lane (University of Nottingham Ningbo China); Stuart McDonald (University of Nottingham Ningbo China) |
| Abstract: | We experimentally explore public good production levels, and the endogenous formation of network structures to facilitate output sharing, among agents with heterogeneous production costs or valuations. Results corroborate the key theoretical insights of Kinateder & Merlino (2017) characterizing how agents form core-periphery networks. However, subjects often produce more and form denser networks than predicted, which sometimes reduces efficiency. There is some tendency for behaviour to converge towards the theoretical equilibrium over repeated play. Our results help us understand the emergence of the ‘law of the few’ in realworld networks, and suggest it is driven by endogenous sorting of heterogeneous agents. |
| Keywords: | Local public goods; Network formation; Experiment; Heterogeneity |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:not:notcdx:2023-02&r=net |
| By: | Irena Barja\v{s}i\'c; Stefano Battiston; Vinko Zlati\'c |
| Abstract: | Credit Valuation Adjustment captures the difference in the value of derivative contracts when the counterparty default probability is taken into account. However, in the context of a network of contracts, the default probability of a direct counterparty can depend substantially on the default probabilities of indirect counterparties. We develop a model to clarify when and how these network effects matter for CVA, in particular in the presence of correlation among counterparties defaults. We provide an approximate analytical solution for the default probabilities. This solution allows for identifying conditions on key parameters such as network degree, leverage and correlation, where network effects yield large differences in CVA (e.g. above 50%), and thus relevant for practical applications. Moreover, we find evidence that network effects induce a multi-modal distribution of CVA values. |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2305.16434&r=net |
| By: | Matthew S. Jaremski; David C. Wheelock |
| Abstract: | This paper provides quantitative evidence on interbank transmission of financial distress in the Panic of 1907 and ensuing recession. Originating in New York City, the panic led to payment suspensions and emergency currency issuance in many cities. Data on the universe of interbank connections show that i) suspension was more likely in cities whose banks had closer ties to banks at the center of the panic, ii) banks with such links were more likely to close in the panic and recession, and iii) banks responded to the panic by rearranging their correspondent relationships, with implications for network structure. |
| JEL: | E44 G21 N11 N12 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31270&r=net |
| By: | Ana Mauleon (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain = Catholic University of Louvain); Simon Schopohl (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain = Catholic University of Louvain); Akylai Taalaibekova (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Vincent Vannetelbosch (CORE - Center of Operation Research and Econometrics [Louvain] - UCL - Université Catholique de Louvain = Catholic University of Louvain) |
| Abstract: | We study a coordination game on a fixed connected network where players have to choose between two projects. Some players are moderate (i.e. they are ex-ante indifferent between both projects) while others are stubborn (i.e. they always choose the same project). Benefits for moderate players are increasing in the number of neighbors who choose the same project. In addition, players are either farsighted or myopic. Farsighted players anticipate the reactions of others while myopic players do not. We show that, when all players are farsighted, full coordination among the moderate players is reached except if there are stubborn players for both projects. When the population is mixed, the set of stable strategy profiles is a refinement of the set of Nash equilibrium strategy profiles. In fact, turning myopic players into farsighted ones eliminates gradually the inefficient Nash equilibria. Finally, we consider a social planner who can improve coordination by means of two policy instruments: adding links to the network (socialization) and/or turning myopic players into farsighted ones (education). |
| Keywords: | Networks, Coordination problems, Stubborn players, Farsighted players, Stability |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04085258&r=net |
| By: | Mohamed Belhaj (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Frédéric Deroïan (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Shahir Safi (Concordia University [Montreal]) |
| Abstract: | We consider agents organized in an undirected network of local complementarities. A principal with a fixed budget offers costly bilateral contracts in order to increase the sum of agents' effort. We study contracts rewarding effort exceeding the effort made in the absence of the principal. First, targeting a subgroup of the whole society becomes optimal under substantial contracting costs, which significantly increases the computational complexity of the principal's problem. In particular, under sufficiently low intensity of complementarities, a correspondence is established between optimal targeting and an NP-hard problem. Second, for any intensities of complementarities, the optimal unit returns offered to all targeted agents are positive for all contracting costs and in general heterogeneous, even though networks are undirected. Yet, heterogeneity never leads to negative returns, which implies that, with these linear payment schemes, coordination is never an issue for the principal. |
| Keywords: | Networked synergies, Optimal targeting, Linear scheme |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04090079&r=net |
| By: | Camilla Mastromarco; Laura Serlenga; Yongcheol Shin |
| Abstract: | We develop a unified stochastic frontier model which controls for the local spatial correlation and the global factor dependence as well as parameter heterogeneity, simultaneously. We then propose the regional productivity network analysis to examine the diffusion impacts of the capital intensity on the labour productivity in the EU. We apply the proposed approach to the dataset consisting of 202 regions in the EU15 countries over 1980-2019, and convincingly unveil that the technological shock diffuses from efficient regions operating on or near the frontier to inefficient regions. This suggests that policies to enhance domestic absorption capacity appear better suited to net receivers of technological shocks whilst policies to attract more R&D investments are appropriate to their transmitters. In this regard we stress the importance of investing European funds in peripheral regions to address regional inequality and polarisation. |
| Keywords: | spatial stochastic frontier model with factors and heterogeneity, CCEX-IV estimator, regional productivity network analysis in the EU, efficiency clusters |
| JEL: | C13 C33 D24 O47 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10404&r=net |
| By: | Denbee, Edward; Julliard, Christian; Li, Ye; Yuan, Kathy |
| Abstract: | Using a structural model, we estimate the liquidity multiplier of an interbank network and banks’ contributions to systemic risk. To provide payment services, banks hold reserves. Their equilibrium holdings can be strategic complements or substitutes. The former arises when payment velocity and multiplier are high. The latter prevails when the opportunity cost of liquidity is large, incentivising banks to borrow neighbors’ reserves instead of holding their own. Consequently, the network can amplify or dampen shocks to individual banks. Empirically, network topology explains cross-sectional heterogeneity in banks’ systemic-risk contributions while changes in the equilibrium type drive time-series variation. |
| Keywords: | financial networks; liquidity; interbank market; payment systems; payment velocity; payment multiplier; key players; systemic risk |
| JEL: | F3 G3 J1 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:106280&r=net |
| By: | Marisa Hidalgo-Hidalgo (Department of Economics, Universidad Pablo de Olavide); Dunia López-Pintado (Department of Economics, Universidad Pablo de Olavide) |
| Abstract: | We present new evidence on ability peer effects in education focusing on a context where first-year students from a Spanish university are randomly organized into pairs within their classroom to collaborate on activities throughout the semester. We focus on how the composition of the pair according to abilities determines collaborative (the activities realized in pairs) and individual (the final exam) achievements. We find positive pair peer effects for the collaborative outcomes, but negative pair peer effects for the individual score. That is, the higher the ability of the partner, the lower one's outcome in the final exam. This second finding is stronger the larger the difference in ability and is mainly driven by men when interacting with other more able men. |
| Keywords: | peer effects, higher education, gender, collaborative tasks. |
| JEL: | D62 I21 I23 J16 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:pab:wpaper:23.07&r=net |
| By: | Péter Csóka (Institute of Finance, Corvinus University of Budapest and Centre for Economic and Regional Studies); P. Jean-Jacques Herings (Department of Econometrics and Operations Research, Tilburg University) |
| Abstract: | We consider financial networks where agents are linked to each other via mutual liabilities. In case of bankruptcy, there are potentially many bankruptcy rules, ways to distribute the assets of a bankrupt agent over the other agents. One common approach is to first apply pairwise netting of agents that have mutual liabilities and next use the proportional rule to determine the payments on the basis of the net liabilities. We refer to this as the pairwise netting proportional rule. The pairwise netting proportional rule satisfies the basic requirements of claims boundedness, limited liability, priority of creditors, and continuity. It also satisfies the desirable properties of net impartiality, an agent that has two creditors with the same net claims pays the same amount to both creditors on top of pairwise netting, and invariance to mitosis, an agent that splits into a number of identical agents is not affecting the payments of the other agents. We demonstrate that if net impartiality and invariance to mitosis, together with the basic requirements, are regarded as imperative properties, then payments should be determined by the pairwise netting proportional rule. |
| Keywords: | Financial networks, systemic risk, portfolio compression, clearing, pairwise netting |
| JEL: | C71 G10 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:2301&r=net |
| By: | Adrián Carro (Banco de España); Patricia Stupariu (Banco de España) |
| Abstract: | Using granular data from the Spanish Central Credit Register, we study the contagion of financial distress via the credit quality channel in the Spanish interbank market. We propose a non-linear contagion mechanism dependent on banks’ balance-sheet structure (specifically, their leverage ratios). Moreover, we explicitly model uncertainty in lenders’ assessments of the probability of default of their borrowers, thus incorporating agents’ lack of complete information and heterogeneous expectations in their assessment of future outcomes. We perform multiple simulations across a wide range of possible levels of stress in the system, and we focus on disentangling the effects of these two key model components by comparing the results of our model with those of a linear and deterministic counterpart. We find that non-linear contagion leads to substantially larger losses than its linear counterpart for a wide range of intermediate levels of stress in the system, while its effects become negligible for very low and very high stress levels. Regarding uncertainty, we find that its effects, while smaller than those of non-linear contagion, are nonetheless relevant and most important around levels of stress at which different parts of the system become unstable. Interestingly, losses can be amplified or mitigated with respect to the deterministic case depending on the specific level of stress considered. Finally, the interaction between these two model components - non-linear contagion and uncertainty - alters the area where uncertainty matters. |
| Keywords: | financial networks, systemic risk, financial contagion, macroprudential policy, stress testing |
| JEL: | C63 D80 D85 G01 G17 L14 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2212&r=net |
| By: | Chen, Yutong (University of Virginia); Chiplunkar, Gaurav (University of Virginia); Sekhri, Sheetal (University of Virginia); Sen, Anirban (Microsoft Corporation); Seth, Aaditeshwar (Indian Institute of Technology Delhi) |
| Abstract: | We use a new machine learning-enabled, social network based measurement technique to assemble a novel dataset of firms' political connections in India. Leveraging this data along with a long panel of detailed financial transactions of firms, we study how political connections matter during an economic downturn. Using a synthetic difference-in-differences framework, we find that connected firms had 8-10% higher income, sales, and TFPR gains that were persistent for over a three-year period following the crisis. We unpack various mechanisms and show that connected firms were able to delay their short-term payments to suppliers and creditors, delay debt and interest payments, decrease expensive long-term borrowings from banks in favor of short-term non-collateral ones, and increase investments in productive assets such as computers and software. Our method to determine political connections is portable to other applications and contexts. |
| Keywords: | political connections, firms, crisis |
| JEL: | O16 D22 D73 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16131&r=net |
| By: | Mariia Artemova (Vrije Universiteit Amsterdam); Francisco Blasques (Vrije Universiteit Amsterdam); Siem Jan Koopman (Vrije Universiteit Amsterdam) |
| Abstract: | We analyze the role of industrial and non-industrial production sectors in the US economy by adopting a novel multilevel factor model. The proposed model is suitable for high-dimensional panels of economic time series and allows for interdependence structures across multiple sectors. The estimation procedure is based on a multistep least squares method which is simple and fast in its implementation. By analyzing the shock propagation process throughout the network of interconnections, we corroborate some of the key findings about the role of industrial production in the US economy, quantify the importance of propagation effects and shed new light on dynamic sectoral linkages. |
| Keywords: | Dynamic factor model, Interconnectedness, Output growth. |
| JEL: | C22 C32 C38 C51 |
| Date: | 2023–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:tin:wpaper:20230021&r=net |