Economics Seminar: Piero Gottardi (European University Institute)

Sabancı University
Faculty of Arts and Social Sciences

ECONOMICS SEMINAR

Risk-sharing and Contagion in Networks

Piero Gottardi

(European University Institute)

Friday, December 20, 2013

14:00    FASS 2034

Abstract:

The aim of this paper is to investigate how the capacity of an economic system toabsorb shocks depends on the specific pattern of interconnections established amongfinancial firms. The key trade-o ff at work is between the risk-sharing gains enjoyed byfirms when they become more interconnected and the large-scale costs resulting from anincreased risk exposure. We focus on two dimensions of the network structure: the size ofthe (disjoint) components into which the network is divided, and the "relative density"of connections within each component. We find that when the distribution of the shocksdisplays "fat" tails extreme segmentation is optimal, while minimal segmentation andhigh density are optimal when the distribution exhibits "thin" tails. For other, less regular distributions intermediate degrees of segmentation and sparser connections arealso optimal. We also find that there is typically a conflict between efficiency andpairwise stability, due to a "size externality" that is not internalized by firms whobelong to components that have reached an individually optimal size. Finally, optimality requires perfect assortativity for firms in a component.

P.S.: The seminar will be held in English.