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Working Paper
Connected for Better or Worse? The Role of Production Networks in Financial Crises
We study how production networks shape the severity of Sudden Stops. We build a small open economy model with collateral constraints and input–output linkages, derive a sufficient statistic that maps network structure onto the amplification of tradable shocks, and show that a planner optimally introduces sectoral wedges to reduce amplification. Using OECD input-output data and Sudden Stop episodes, we document systematic network differences between emerging and advanced economies and show they predict crisis severity. A calibrated three-sector DSGE model disciplined by these differences ...
Working Paper
Filling in the Blanks: Network Structure and Interbank Contagion
The network pattern of financial linkages is important in many areas of banking and finance. Yet bilateral linkages are often unobserved, and maximum entropy serves as the leading method for estimating counterparty exposures. This paper proposes an efficient alternative that combines information-theoretic arguments with economic incentives to produce more realistic interbank networks that preserve important characteristics of the original interbank market. The method loads the most probable links with the largest exposures consistent with the total lending and borrowing of each bank, yielding ...
Working Paper
The Role of Interbank Relationships and Liquidity Needs
In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. We assess how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank?s ability to meet its liquidity demand. We use quarterly data of bilateral interbank credit exposures between all German banks from 2000 to 2008 to measure interbank relationships and the network characteristics. We match these data with the bids placed by the individual banks in the European Central Bank?s (ECB) weekly repo auctions. The bids measure each ...
Working Paper
Convergence of Cultural Traits with Time-Varying Self-Confidence in the Panebianco (2014) Model--A Corrigendum
We highlight that convergence in repeated averaging models commonly used to study cultural traits or opinion dynamics is not equivalent to convergence in Markov chain settings if transition matrices are time-varying. We then establish a new proof for the convergence of cultural traits in the model of Panebianco (2014) correcting the existing proof. The new proof provides novel insights on the long-run outcomes for inessential individuals. We close with a discussion of conditions for convergence in repeated averaging models with time-varying transition matrices.
Working Paper
Costly Information Intermediation as a Natural Monopoly
In this paper, we show that information trade has similar characteristics to a natural monopoly, where competition may be detrimental to efficiency due either to the duplication of direct costs or the slowing down of information dissemination. We present a model with two large populations in which consumers are randomly matched to providers on a period-by-period basis. Despite a moral hazard problem, cooperation can be sustained through an institution that gives incentives to information exchange. We consider different information pricing mechanisms (membership vs. buy and sell) and different ...
Working Paper
Costly Information Intermediation: Quality vs. Spillovers
We analyze information intermediaries in large economies with costly information acquisition. Intermediaries face a trade-off between quality and dissemination speed. Both altruistic policymakers and profit-maximizing monopolists optimally choose to sample limited information, increasing the number of partially informed agents and enhancing spillovers despite slower information accumulation. Altruistic information-sharing bureaus minimize fees by inducing low provider default rates, while monopolist bureaus maximize fees through higher faulty service rates. Information trade resembles a ...
Working Paper
Costly Information Intermediation as a Natural Monopoly
Many markets rely on information intermediation to sustain cooperation between large communities.We identify a key trade-off in costly information intermediation: intermediaries can create trust by incentivizing information exchange, but with too much information acquisition, intermediation becomes expensive, with a resulting high equilibrium default rate and a low fraction of agents buying this information. The particular pricing scheme and the competitive environment affect the direct and indirect costs of information transmission, represented by fees paid by consumers and the expected loss ...
Working Paper
Making Friends Meet: Network Formation with Introductions
This paper proposes a parsimonious model of network formation with introductions in the presence of intermediation rents. Introductions allow two nodes to form a new connection on favorable terms with the help of a common neighbor. The decision to form links via introductions is subject to a trade-off between the gains from having a direct connection at lower cost and the potential losses for the introducer from lower intermediation rents. When nodes take advantage of introductions, stable networks tend to exhibit a minimum of clustering. At the same time, intermediary nodes have incentives ...
Working Paper
Making Friends Meet: Network Formation with Introductions
This paper proposes a parsimonious model of network formation with introductions in the presence of intermediation rents. Introductions allow two nodes to form a new connection on favorable terms with the help of a common neighbor. The decision to form links via introductions is subject to a trade-off between the gains from having a direct connection at lower cost and the potential losses for the introducer from lower intermediation rents. When nodes take advantage of introductions, stable networks tend to exhibit a minimum amount of clustering. At the same time, intermediary nodes have ...
Working Paper
Making Friends Meet: Network Formation with Introductions
High levels of clustering—the tendency for two nodes in a network to share a neighbor—are ubiquitous in economic and social networks across different applications. In addition, many real-world networks show high payoffs for nodes that connect otherwise separate network regions, representing rewards for filling “structural holes” in the sense of Burt (1992) and keeping distances in networks short. This paper proposes a parsimonious model of network formation with introductions and intermediation rents that can explain both these features. Introductions make it cheaper to create ...