Risk-sharing and contagion in networks

• Autores: Antonio Cabrales Goitia, Piero Gottardi, Fernando Vega-Redondo
• Localización: Documentos de trabajo ( FEDEA ), ISSN 1696-7496, Nº. 18, 2014, págs. 1-71
• Idioma: inglés
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• Resumen

  • We investigate the trade-off, arising in financial networks, between higher risk-sharing and greater exposure to contagion when the connectivity increases. We find that with shock distributions displaying �fat� tails, extreme segmentation into small components is optimal, while minimal segmentation and high density of connections are optimal with distributions exhibiting �thin� tails. For less regular distributions, intermediate degrees of segmentation and sparser connections are optimal. If firms are heterogeneous, optimality requires perfect assortativity in their linkages. In gen- eral, however, a conflict arises between optimality and individual incentives to establish linkages, due to a �size externality� not internalized by firms.