Antonio Cabrales (UCL)
"Network formation and heterogeneous risks (w/Piero Gottardi) "
Abstract: We study a new model to study the effect of contract externalities that arise through shock transmission. We model a financial network where Investors (Banks) enjoy direct and indirect benefits from linking with one another. Borrowers (Customers) benefit from having a connection with a Bank, but they are a cost to both direct and indirect connections. In efficient networks the Banks should form large connected components with few Customers attached. The equilibrium networks, on the other hand, have more Customers attached, they are core-periphery structures, and components are also smaller than the efficient ones. We study extensions with heterogeneous Customers, with diversity in the costs to Banks of linking with Customers, and with asymmetric information.
When: Friday 19th February 2021 - 2:00pm
Where: Zoom
Reading Group: Networks Webinar