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on Network Economics |
| By: | Wayne Yuan Gao; Ming Li; Zhengyan Xu |
| Abstract: | We develop a tractable identification approach for strategic network formation models with both strategic link interdependence and individual unobserved heterogeneity (fixed effects). The key challenge is that endogenous network statistics (e.g. number of common friends) enter the link formation equation, while the mapping from model primitives to equilibrium network structure is generally intractable. Our approach sidesteps this difficulty using a ``bounding-by-$c$'' technique that treats endogenous covariates as random variables and exploits monotonicity restrictions to obtain identifying information. We derive a system of identifying restrictions based on subnetwork configurations: tetrad-based restrictions that completely eliminate all individual fixed effects, triad-based restrictions that partially difference out fixed effects, and general weighted cycle-based restrictions, along with point identification results. Preliminary simulations show that our approach can deliver informative bounds on the structural parameters. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.08634 |
| By: | Anna Pirogova; Anna Mancini; Tiziano Squartini; Giulio Cimini |
| Abstract: | A central challenge in financial economics is understanding how credit networks form under informational noise. We introduce the concept of topological capital, arguing that banks increasingly rely on topological certification, interpreting a borrower's connectivity as a primary proxy for creditworthiness. Using a novel dataset of bank-firm relationships manually extracted from Italian financial statements, we implement a multi-stage empirical framework, benchmarking empirical patterns against a maximum-entropy benchmark, to separate the determinants of credit access from those of loan volumes. Our results indicate that network topology systematically outperforms traditional fundamentals. In the link-formation stage, connectivity breeds further connectivity through an amplified preferential attachment mechanism. In the loan-sizing stage, network strength absorbs the explanatory power of balance-sheet metrics, documenting a profound network substitution effect where topological signals effectively replace physical collateral across all corporate segments. For SMEs, we identify a critical signal divergence: reported debt acts as a risk signal, while network footprint serves as market validation. Furthermore, we reveal a diversification paradox: while firms fragment debt to avoid hold-up risks, over-diversification leads to a complexity penalty that stagnates credit depth and inflates systemic Loss Given Default. Ultimately, our findings signal the twilight of the balance sheet as the primary anchor of corporate lending, calling for a shift toward topological macro-prudential supervision to manage vulnerabilities invisible to traditional bilateral indicators. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.12417 |
| By: | Antoine Mandel; Vipin P. Veetil |
| Abstract: | We study how idiosyncratic firm-level shocks generate aggregate volatility and tail risk when they propagate through a production network under overlapping adjustment: new productivity draws arrive before the economy reaches the static equilibrium associated with earlier draws. Each innovation generates a `productivity wave' that mixes and dissipates over time as it travels through the production network. Macroeconomic fluctuations emerge from the interference between these waves of different vintages. The interference between these waves is governed by the dominant transient eigenvalue of the production network, and therefore so is the macroeconomic fluctuations they generate. In such a dynamic regime, the tail of the degree distribution is a markedly weaker determinant of macro fluctuations than in the fully adjusted static benchmark. And the macroeconomic significance of the degree-heterogeneity of production networks cannot be known without knowing the rate at which the economy converges to equilibrium or equivalently the spectral properties of the production network. More concretely, once we permit the time-averaging of shocks, granular shocks may account for only a small fraction of the empirically observed aggregate volatility. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.05367 |
| By: | Temel, Tugrul |
| Abstract: | Modern economies are networks of interdependent sectors, yet conventional tools for industrial policy overlook the critical pathways, bottlenecks, and communities that de- termine how shocks propagate and productivity gains diffuse. This paper develops a replicable computational methodology—three graph-theoretic algorithms—to transform dense input-output tables into actionable policy diagnostics. The framework identifies critical upstream and downstream pathways, constructs cascading layers of distortion propagation, and quantifies network resilience through community detection and edge- betweenness centrality. Applying this toolkit to Turkey’s 2018 manufacturing sector reveals three principal findings: finance operates as a critical bottleneck where reg- ulated upstream inputs converge; the network exhibits only moderate resilience, with six between-community edges carrying disproportionate systemic risk; and two reinforc- ing cycles—{manufacturing → agriculture → construction → manufacturing} and {manufacturing → energy → construction → manufacturing}—amplify distortions. These results generate specific policy recommendations: prioritize financial sector reforms, coordinate regulation across energy-transport-finance pathways, and protect vulnerable between-community edges. The methodology enables evidence-based, network-aware indus- trial policy applicable to any input-output dataset. |
| Keywords: | production networks; cascading effects; network risk; graph-theoretic analysis; Turkiye; |
| JEL: | C63 C67 D57 L16 L52 |
| Date: | 2026–02–20 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128113 |
| By: | Soumen Majhi; Anna Mancini; Giulio Cimini |
| Abstract: | Assessing the resilience of the economy requires accounting for its intrinsic multi-layer nature, by assessing for instance how disruptions at the firm level spread through the production network and propagate to the banking sector. Methods exist to measure the reverberation of shocks over the multilayer network of supply-customer relations among firms, corporate loans of banks and their interbank market exposures. However, empirical network data are often privacy protected and thus inaccessible to researchers and regulators. In this work we develop an unified framework, combining state-of-the art techniques to reconstruct the whole multilayer structure of the economy from balance sheet information of banks and firms, as well as dynamics of shock propagation from the inter-firm to the interbank layers. We showcase application of our methodology using data of the Italian economy. We identify the most systemically important firms and industries, as well as the most vulnerable banks, further assessing the determinants of systemic risk -- obtaining results coherent with the empirical literature on network contagion. Overall, our framework allows performing detailed network-based stress tests on a digital twin of the economy, without requiring detailed network information that is difficult to acquire. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.09854 |
| By: | Canen, Nathan (University of Warwick and CAGE); Chadha, Shantanu (University of Warwick) |
| Abstract: | In the linear-in-means model, endogeneity arises naturally due to the reflection problem. A common solution is to use Instrumental Variables (IVs) based on higherorder network links, such as using friends-of-friends’ characteristics. We first show that such instruments are unlikely to work well in many applied settings: in very sparse or very dense networks, friends-of-friends may be similar to the original links. This implies that the IVs may be weak or their first stage estimand may be undefined. For a class of random graphs, we use random graph theory and characterize regimes where such instruments perform well, and when they would not. We prove how weak-IV robust inference can be adapted to this environment, and how scaling the network can help. We provide extensive Monte Carlo simulations and revisit empirical applications, showing the prevalence of such issues in empirical practice, and how our results restore valid inference. |
| Keywords: | Social Networks ; Weak Instruments ; Peer Effects ; Identification |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:wrk:warwec:1603 |
| By: | Schöller, Vanessa |
| Abstract: | The smooth functioning of the repo market is essential to financial stability. However, the market has faced repeated episodes of stress in recent years. This paper examines the resilience of the euro-denominated repo market during recent episodes of elevated financial stress, drawing on transaction-level data and applying network analysis. The institutional repo network displays a core–periphery structure, with connectivity intensifying during stress periods. At the sectoral level, trading volumes and repo spreads remain broadly stable. For the euro repo market as a whole, financial stress is associated with lower spreads, consistent with the interpretation that the market functions as a shock absorber. JEL Classification: G01, G21, G23, E44 |
| Keywords: | haircuts, network analysis, non-banks, repo spreads |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263205 |
| By: | Gianmarco Daniele; Adam Soliman; Juan Vargas |
| Abstract: | We study how a sharp expansion in Colombian cocaine production propagated internationally through global trade networks, generating substantial social costs. In Colombia, the production surge increased homicide rates by 41% in port areas and by 26% in cocaine producing municipalities. Violence then spilled across the border into Ecuador, a transit hub with negligible cocaine production but dense maritime trade links, contributing to a nearly five-fold increase in homicide rates. The shock travelled through criminal supply chains that exploit legitimate perishable export routes, notably bananas, concentrating activity at maritime chokepoints. In Europe, countries with stronger pre-shock trade ties to Colombia and Ecuador experienced sharp increases in cocaine seizures linked to these origins, lower retail prices, a 60% rise in cocaine consumption in port cities, and 7% higher violent crime in port provinces. Together, these results show that shocks in illicit markets propagate internationally through the same trade networks as legal trade shocks, concentrating violence at contested logistical bottlenecks and expanding downstream drug markets. |
| Keywords: | illicit trade, international spillovers, violence, trade networks, crime |
| Date: | 2026–03–20 |
| URL: | https://d.repec.org/n?u=RePEc:cep:cepdps:dp2167 |
| By: | Tamás Krisztin (International Institute for Applied Systems Analysis); Philipp Piribauer (WIFO) |
| Abstract: | This document introduces the R library estimateW to estimate spatial weight matrices for Bayesian spatial econometric panel models. The approach focuses on spatial weights that are binary prior to row-standardization. However, unlike recent literature our approach requires no strong a priori assumptions on (socio-)economic distances between the spatial units. The estimation approach relies on efficient Bayesian Gibbs sampling techniques and the library supports a variety of the most common spatial econometric panel specifications. estimateW moreover supports to elicit flexible shrinkage priors, which allow to estimate spatial spillovers even in settings where the number of time period is small relative to number of cross-sectional units. An empirical illustration for European NUTS-1 regions demonstrates that the method recovers plausible spatial dependence patterns, interpretable spillover effects, and meaningful clustering in the estimated network structure. |
| Keywords: | Bayesian spatial econometrics, spatial weight matrix estimation, regional economic growth, R |
| Date: | 2026–03–17 |
| URL: | https://d.repec.org/n?u=RePEc:wfo:wpaper:y:2026:i:722 |
| By: | Isaak Mengesha; Debraj Roy |
| Abstract: | Economic growth is conventionally analyzed at the national level, yet cities generate the bulk of global output. Here we construct GDP trajectories for 8, 808 functional urban areas (FUAs) across 165 countries over 1993-2019 using satellite-derived nighttime light data and identify 17 distinct, persistent growth regimes through clustering of full temporal trajectories. Rather than converging toward a common frontier, FUAs inhabit distinct economic niches-analogous to ecological niches-defined by shared volatility profiles, shock responses, and long-run dynamics that transcend national boundaries. Cities within the same country frequently belong to different regimes, while structurally similar cities on different continents share the same one; regime membership explains 16% of within-country growth variance beyond country fixed effects. National-level convergence emerges as an aggregation artifact: conditional convergence operates within regimes, not globally. A directed propagation network reveals that shocks transmit along lines of structural similarity rather than geographic proximity, with advanced economies exporting disturbances and emerging economies absorbing or amplifying them. Within-country spatial inequality declines with industrialization maturity, consistent with growth initially concentrating in leading cities before diffusing across the urban system. The global economy is better understood as an ecology of heterogeneous urban growth regimes than as a collection of nations on a shared development path. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.16007 |
| By: | Jiyuan Lyu |
| Abstract: | This paper proposes a shift in perspective on two long-standing problems in political economy: the reduction of complex labor and the transformation problem. Rather than searching for a unique constant solution, we reframe both problems as characterizing the space of feasible distributions under the constraints imposed by the objective physical-production network. We build an input--output model that includes fixed-capital stocks and prove mathematically that, as long as the macroeconomy generates a physical surplus, all reduction ratios that can sustain the subsistence floor of the labor force form a bounded value feasible set. Within this multi-dimensional space, the classical two macro-aggregates equalities can be satisfied simultaneously for a well-defined range of profit rates, so that the Law of Labor Value and the nominal price system are logically consistent without violating the physical reproduction floor. We validate the theoretical framework with an empirical test based on China's 199-sector input-output network for 2023. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.09450 |
| By: | Ferrari Minesso, Massimo; Lebastard, Laura; Bagur, Olga Triay |
| Abstract: | This paper provides the first causal estimate of the economic impact of interlinking payment systems across countries. We exploit a new dataset of payment systems interlinking initiatives, which identifies over 2, 000 connections, and employ standard gravity methods to estimate their impact on trade flows. Consistent with trade costs theory, we find that inter-connected countries have around 4% higher trade volumes, roughly half the effect of a trade agreement and a quarter of the effect of a common currency area. Our results isolate the average effect on trade, of directly connecting fast payment systems, net of country pairs already accessing the correspondent banking network. The estimated impact is larger for payment systems that allow wholesale transactions, those that link small countries, which, typically, are less connected to the correspondent banking network, and for geographical areas that face high cross-border payment costs. This suggests that the benefits from interlinking are derived from reduced cross-border trade costs. Our findings are causal – proved by parametric and semi-parametric estimators – and robust to numerous additional controls, including exclusion of the largest interlinked country group, the euro area. JEL Classification: E42, F15, F30 |
| Keywords: | fast payment systems, interlinking, trade |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20263202 |