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on Network Economics |
| By: | Sergio Currarini; Francesco Feri; Bjoern Hartig; Miguel A. Meléndez-Jiménez |
| Abstract: | We design an experiment to study how agents make use of information in networks. Agents receive payoff-relevant signals automatically shared with neighbors. We compare the use of information in different network structures, considering games in which strategies are substitute, complement and orthog- onal. To study the incentives to share information across games, we also allow subjects to modify the network before playing the game. We find behavioral deviations from the theoretical prediction in the use of information, which de- pend on the network structure, the position in the network and the strategic nature of the game. There is also a bias toward oversharing information, which is related to risk aversion and the position in the network. |
| Keywords: | Networks, experiment, information sharing, strategic complements, strategic substitutes, pairwise stability |
| JEL: | C72 C91 C92 D82 D85 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:20/08&r=all |
| By: | Matthew O. Jackson; Agathe Pernoud |
| Abstract: | We analyze how interdependencies between organizations in financial networks can lead to multiple possible equilibrium outcomes. A multiplicity arises if and only if there exists a certain type of dependency cycle in the network that allows for self-fulfilling chains of defaults. We provide necessary and sufficient conditions for banks' solvency in any equilibrium. Building on these conditions, we characterize the minimum bailout payments needed to ensure systemic solvency, as well as how solvency can be ensured by guaranteeing a specific set of debt payments. Bailout injections needed to eliminate self-fulfilling cycles of defaults (credit freezes) are fully recoverable, while those needed to prevent cascading defaults outside of cycles are not. We show that the minimum bailout problem is computationally hard, but provide an upper bound on optimal payments and show that the problem has intuitive solutions in specific network structures such as those with disjoint cycles or a core-periphery structure. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.12861&r=all |
| By: | Roland Pongou (Department of Economics, University of Ottawa, Ottawa, ON); Guy Tchuente (School of Economics, University of Kent); Jean-Baptiste Tondji (Dept. of Economics and Finance, The University of Texas Rio Grande Valley) |
| Abstract: | We address the problem of finding the optimal lockdown and reopening policy during a pandemic like COVID-19 for a social planner who prioritizes health over short-term wealth accumulation. Agents are connected through a fuzzy network of contacts. The planner's objective is to determine the policy that contains the spread of infection below a tolerable incidence level, which maximizes the present discounted value of real income, in that order of priority. We show theoretically that the planner's problem has a unique solution. The optimal policy depends both on the configuration of the contact network and the tolerated infection incidence. Using simulations, we apply these theoretical findings to: (i) quantify the tradeoff between the economical cost of the pandemic and the infection incidence allowed by the social planner and show how this tradeoff depends on network configuration; (ii) evaluate the correlation between different measures of network centrality and individual lockdown probability, and derive implications for the optimal design of surveys on social distancing behavior and network structure; and (iii) analyze how segregation induces differential health and economic dynamics in minority and majority populations, also illustrating the crucial role of patient zero in these dynamics. |
| Keywords: | COVID-19, health-vs-wealth prioritization, economic cost, fuzzy networks, network centrality, segregation, patient zero, optimally targeted lockdown policy. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ott:wpaper:2009e&r=all |
| By: | Andras Borsos (Magyar Nemzeti Bank (Central Bank of Hungary)); Bence Mero (Magyar Nemzeti Bank (Central Bank of Hungary)) |
| Abstract: | In this paper we develop a model of shock propagation in the banking system with feedback channels towards the real economy. Our framework incorporates the interactions between the network of banks (exhibiting contagion mechanisms among them) and the network of firms (transmitting shocks to each other along the supply chain) which systems are linked together via loan-contracts. Our hypothesis was, that the feedback mechanisms in these coupled networks could amplify the losses in the economy beyond the shortfalls expected when we consider the subsystems in isolation. As a test for this, we embedded the model into a liquidity stress testing framework of the Central Bank of Hungary, and our results proved the importance of the real economy feedback channel, which almost doubled the system-wide losses. To illustrate the versatility of our modeling framework, we presented two further applications for different policy purposes: (i) We elaborated a way to use the model for SIFI identification, (ii) and we showed an example of assessing the impact of shocks originated in the real economy. |
| Keywords: | systemic risk,financial network, production network, contagion |
| JEL: | G01 G21 G28 C63 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2020/6&r=all |
| By: | Matthew O. Jackson; Agathe Pernoud |
| Abstract: | We provide an overview of the relationship between financial networks and systemic risk. We present a taxonomy of different types of systemic risk, differentiating between direct externalities between financial organizations (e.g., defaults, correlated portfolios and firesales), and perceptions and feedback effects (e.g., bank runs, credit freezes). We also discuss optimal regulation and bailouts, measurements of systemic risk and financial centrality, choices by banks' regarding their portfolios and partnerships, and the changing nature of financial networks. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.12702&r=all |
| By: | Monica Billio (Department of Economics, University Of Venice Cà Foscari); Roberto Casarin (Department of Economics, University Of Venice Cà Foscari); Michele Costola (Department of Economics, University Of Venice Cà Foscari); Matteo Iacopini (Vrije Universiteit Amsterdam) |
| Abstract: | Network models represent a useful tool to describe the complex set of financial relationships among heterogeneous firms in the system. In this paper, we propose a new semiparametric model for temporal multilayer causal networks with both intra- and inter-layer connectivity. A Bayesian model with a hierarchical mixture prior distribution is assumed to capture heterogeneity in the response of the network edges to a set of risk factors including the European COVID-19 cases. We measure the financial connectedness arising from the interactions between two layers defined by stock returns and volatilities. In the empirical analysis, we study the topology of the network before and after the spreading of the COVID-19 disease. |
| Keywords: | Multilayer networks, financial markets, COVID-19 |
| JEL: | C11 C58 G10 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ven:wpaper:2021:05&r=all |
| By: | Frank Schweitzer; Giona Casiraghi; Mario V. Tomasello; David Garcia |
| Abstract: | The dynamics of collaboration networks of firms follow a life-cycle of growth and decline. That does not imply they also become less resilient. Instead, declining collaboration networks may still have the ability to mitigate shocks from firms leaving, and to recover from these losses by adapting to new partners. To demonstrate this, we analyze 21.500 R\&D collaborations of 14.500 firms in six different industrial sectors over 25 years. We calculate time-dependent probabilities of firms leaving the network and simulate drop-out cascades, to determine the expected dynamics of decline. We then show that deviations from these expectations result from the adaptivity of the network, which mitigates the decline. These deviations can be used as a measure of network resilience. |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2011.13369&r=all |
| By: | Julia M. Rohrer (Department of Psychology, University of Leipzig & International Max Planck Research School on the Life Course (LIFE), Max Planck Institute for Human Development, Berlin); Tamás Keller (Institute of Economics, Centre for Economic and Regional Studies. 1097 Budapest, Tóth Kálmán utca 4. and Department of Economics, Corvinus University of Budapest. 1093 Budapest Fõvám tér 8. Computational Social Science - Research Center for Educational and Network Studies, Centre for Social Sciences. 1097 Budapest, Tóth Kálmán utca 4. and Evolutionary Systems Research Group, Centre for Ecological Research); Felix Elwert (Department of Sociology & Department of Biostatistics and Medical Informatics, University of Wisconsin-Madison) |
| Abstract: | Can outside interventions foster socio-culturally diverse friendships? We executed a large field experiment that randomized the seating charts of 182 primary-school classrooms (N=2,996 students) for the duration of one semester. We found that being seated next to each other increased the probability of a mutual friendship from 15% to 22% on average. Furthermore, induced proximity increased the latent propensity toward friendship equally for all students, regardless of students’ dyadic similarity with respect to educational achievement, gender, and ethnicity. However, the probability of a manifest friendship increased more among similar than among dissimilar students. Our findings demonstrate that a scalable light-touch intervention can affect face-to-face networks and foster diverse friendships in groups that already know each other, but they also highlight that transgressing boundaries defined by ethnicity and gender remains an uphill battle. |
| Keywords: | Friendship formation, Social networks, Diversity, Homophily, Randomized field experiment, Deskmates |
| JEL: | C93 I21 I24 J18 Z13 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:2053&r=all |
| By: | Ernest Liu; Aleh Tsyvinski |
| Abstract: | We associate a dynamical system with input-output networks and study its spectral properties. Specifically, we develop a dynamic production network model featuring adjustment costs of changing inputs and thus gradual recovery from temporary TFP shocks. First, we explicitly solve for the output and welfare effects of temporary shocks. We show shocks to sectors that generate significant sales through distant linkages to the consumer are most damaging. Second, we eigendecompose the input-output matrix and show, because higher-order linkages take longer to recover, fewer eigenvectors are needed to represent the welfare impact of sectoral shocks in the dynamic economy compared to the Domar weights. Third, we analyze the U.S. input-output structure and show the welfare impact of temporary shocks has a low-dimensional, 4-factor structure (out of 171 eigenvectors). Finally, we revisit the historical use of input-output analysis in target selection for bombing Nazi Germany and Imperial Japan during WWII. |
| JEL: | E0 E23 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28178&r=all |
| By: | Vasily Korovkin; Alexey Makarin |
| Abstract: | How do severe shocks, such as war, alter the economy? We study how a country's production network is affected by a devastating but localized conflict. We use novel transaction-level data on Ukrainian railway shipments, complemented by administrative data on firms, to document the effect of war on firms and interfirm trade. First, we document substantial propagation effects-trade declines even between firms outside the conflict areas if one of them had traded with the conflict areas before the war. Our estimates suggest that the magnitude of the second-degree effect of conflict is one-third of the first-degree effect. Second, we study firm-level consequences of a change in production network structure. Firms that, for exogenous reasons, become more central in the production network after the start of the conflict receive a lasting boost to their revenues and a temporary one to their profits. A temporary increase in markups suggests a rise in market power as one of the mechanisms. Finally, in a production networks model, we separate the effects of exogenous firm removal and subsequent endogenous network adjustment on firm revenue distribution. At the median of the distribution, network adjustment compensates for 72% of network destruction. |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2011.14756&r=all |
| By: | de Gendre, Alexandra (Maastricht University); Salamanca, Nicolás (Melbourne Institute of Applied Economic and Social Research) |
| Abstract: | Studying with higher ability peers increases student performance, yet we have little idea why. We exploit random assignment of students to classrooms and find positive peer effects on test scores. With rich data on nineteen potential mechanisms, we then estimate how effects on attitudes, parents, and teachers could drive these results. Higher-achieving peers reduce student effort, increase student university aspirations, increase parental time investments and parental strictness, and have precise null effects elsewhere. None of these mechanisms, however, explain our peer effect on test scores. Our results highlight promising avenues for understanding ability peer effects. |
| Keywords: | random assignment, standardized test, parental investments, school inputs, mediation analysis |
| JEL: | I23 I26 D13 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13938&r=all |
| By: | Julian di Giovanni |
| Abstract: | The recent era of globalization has witnessed growing cross-country trade integration as firms’ production chains have spread across the world, and with stock market returns becoming more correlated across countries. While research has predominantly focused on how financial integration impacts the propagation of shocks across international financial markets, trade also influences these cross-border spillovers. In particular, one important aspect, highlighted by the recent work of di Giovanni and Hale (2020), is how the global production network influences the transmission of U.S. monetary policy to world stock markets. |
| Keywords: | global production network; asset prices; monetary policy shocks |
| JEL: | F0 G1 |
| Date: | 2021–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:89392&r=all |
| By: | Domenico Delli Gatti; Severin Reissl |
| Abstract: | We employ a new macro-epidemiological agent based model to evaluate the “lives vs livelihoods” trade-off brought to the fore by Covid-19. The disease spreads across the networks of agents’ social and economic contacts and feeds back on the economic dimension of the model through various channels such as employment and consumption demand. We show that under a lockdown scenario the model is able to closely reproduce the epidemiological dynamics of the first wave of the coronavirus epidemic in Lombardy. We then explore the efficacy of the fiscal response to Covid-19 which may take different routes: income support, liquidity provision, credit guarantees. In an agent based setting we gain additional insights on the way in which fiscal measures impact not only on GDP but also on the defaults of firms and the allocation of inputs. We find that liquidity support for firms, a short-time working scheme with compensation for workers, and direct transfer payments to households are effective policy tools to alleviate the economic impact of the epidemic and the lockdown. |
| Keywords: | agent-based models, epidemic, Covid, fiscal policy |
| JEL: | E21 E22 E24 E27 E62 E65 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8763&r=all |