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on Network Economics |
| By: | Matthew Elliott; Benjamin Golub |
| Abstract: | Suppose agents can exert costly effort that creates nonrival, heterogeneous benefits for each other. At each possible outcome, a weighted, directed network describing marginal externalities is defined. We show that Pareto efficient outcomes are those at which the largest eigenvalue of the network is 1. An important set of efficient solutions, Lindahl outcomes, are characterized by contributions being proportional to agents' eigenvector centralities in the network. The outcomes we focus on are motivated by negotiations. We apply the results to identify who is essential for Pareto improvements, how to efficiently subdivide negotiations, and whom to optimally add to a team. |
| Date: | 2021–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2107.04185&r= |
| By: | Panagiotis Kanellopoulos; Maria Kyropoulou; Hao Zhou |
| Abstract: | We study financial systems from a game-theoretic standpoint. A financial system is represented by a network, where nodes correspond to firms, and directed labeled edges correspond to debt contracts between them. The existence of cycles in the network indicates that a payment of a firm to one of its lenders might result to some incoming payment. So, if a firm cannot fully repay its debt, then the exact (partial) payments it makes to each of its creditors can affect the cash inflow back to itself. We naturally assume that the firms are interested in their financial well-being (utility) which is aligned with the amount of incoming payments they receive from the network. This defines a game among the firms, that can be seen as utility-maximizing agents who can strategize over their payments. We are the first to study financial network games that arise under a natural set of payment strategies called priority-proportional payments. We investigate the existence and (in)efficiency of equilibrium strategies, under different assumptions on how the firms' utility is defined, on the types of debt contracts allowed between the firms, and on the presence of other financial features that commonly arise in practice. Surprisingly, even if all firms' strategies are fixed, the existence of a unique payment profile is not guaranteed. So, we also investigate the existence and computation of valid payment profiles for fixed payment strategies. |
| Date: | 2021–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2107.06623&r= |
| By: | Bryan S. Graham (Institute for Fiscal Studies and University of California, Berkeley) |
| Abstract: | Many economic activities are embedded in networks: sets of agents and the (often) rivalrous relationships connecting them to one another. Input sourcing by ?rms, interbank lending, scienti?c research, and job search are four examples, among many, of networked economic activities. Motivated by the premise that networks’ structures are consequential, this chapter describes econometric methods for analyzing them. I emphasize (i) dyadic regression analysis incorporating unobserved agent-speci?c heterogeneity and supporting causal inference, (ii) techniques for estimating, and conducting inference on, summary network parameters (e.g., the degree distribution or transitivity index); and (iii) empirical models of strategic network formation admitting interdependencies in preferences. Current research challenges and open questions are also discussed. |
| Date: | 2019–12–16 |
| URL: | https://d.repec.org/n?u=RePEc:ifs:cemmap:71/19&r= |
| By: | William A. Barnett; Xue Wang; Hai-Chuan Xu; Wei-Xing Zhou |
| Abstract: | We model hierarchical cascades of failures among banks linked through an interdependent network. The interaction among banks include not only direct cross-holding, but also indirect dependency by holding mutual assets outside the banking system. Using data extracted from the European Banking Authority, we present the interdependency network composed of 48 banks and 21 asset classes. Since interbank exposures are not public, we first reconstruct the asset/liability cross-holding network using the aggregated claims. For the robustness, we employ three reconstruction methods, called $\textit{Anan}$, $\textit{Ha\l{}a}$ and $\textit{Maxe}$. Then we combine the external portfolio holdings of each bank to compute the interdependency matrix. The interdependency network is much denser than the direct cross-holding network, showing the complex latent interaction among banks. Finally, we perform macroprudential stress tests for the European banking system, using the adverse scenario in EBA stress test as the initial shock. For different reconstructed networks, we illustrate the hierarchical cascades and show that the failure hierarchies are roughly the same except for a few banks, reflecting the overlapping portfolio holding accounts for the majority of defaults. Understanding the interdependency network and the hierarchy of the cascades should help to improve policy intervention and implement rescue strategy. |
| Date: | 2021–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2106.14168&r= |
| By: | Mohammad Rasouli; Michael I. Jordan |
| Abstract: | With the growing use of distributed machine learning techniques, there is a growing need for data markets that allows agents to share data with each other. Nevertheless data has unique features that separates it from other commodities including replicability, cost of sharing, and ability to distort. We study a setup where each agent can be both buyer and seller of data. For this setup, we consider two cases: bilateral data exchange (trading data with data) and unilateral data exchange (trading data with money). We model bilateral sharing as a network formation game and show the existence of strongly stable outcome under the top agents property by allowing limited complementarity. We propose ordered match algorithm which can find the stable outcome in O(N^2) (N is the number of agents). For the unilateral sharing, under the assumption of additive cost structure, we construct competitive prices that can implement any social welfare maximizing outcome. Finally for this setup when agents have private information, we propose mixed-VCG mechanism which uses zero cost data distortion of data sharing with its isolated impact to achieve budget balance while truthfully implementing socially optimal outcomes to the exact level of budget imbalance of standard VCG mechanisms. Mixed-VCG uses data distortions as data money for this purpose. We further relax zero cost data distortion assumption by proposing distorted-mixed-VCG. We also extend our model and results to data sharing via incremental inquiries and differential privacy costs. |
| Date: | 2021–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2107.08630&r= |
| By: | P\'al Andr\'as Papp; Roger Wattenhofer |
| Abstract: | We study financial networks where banks are connected by debt contracts. We consider the operation of debt swapping when two creditor banks decide to exchange an incoming payment obligation, thus leading to a locally different network structure. We say that a swap is positive if it is beneficial for both of the banks involved; we can interpret this notion either with respect to the amount of assets received by the banks, or their exposure to different shocks that might hit the system. We analyze various properties of these swapping operations in financial networks. We first show that there can be no positive swap for any pair of banks in a static financial system, or when a shock hits each bank in the network proportionally. We then study worst-case shock models, when a shock of given size is distributed in the worst possible way for a specific bank. If the goal of banks is to minimize their losses in such a worst-case setting, then a positive swap can indeed exist. We analyze the effects of such a positive swap on other banks of the system, the computational complexity of finding a swap, and special cases where a swap can be found efficiently. Finally, we also present some results for more complex swapping operations when the banks swap multiple contracts, or when more than two banks participate in the swap. |
| Date: | 2021–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2107.05359&r= |
| By: | Cordoba, Juan Carlos; He, Sicheng |
| Abstract: | We study endogenous growth in the presence of domestic and international network externalities. In our model, network externalities provide natural protection to first movers and incentivize disruptive innovations without the need for patent protection. Domestic and global growth depends on the extent of network externalities, international compatibility costs, and anti-trust policies. We find that traditional anti-trust policies may lead to unintended outcomes. Policies such as banning price discrimination or collusion may reduce economic growth. In particular, price discrimination and collusion could increase economic growth when network externalities are large in relation to compatibility costs. |
| Date: | 2021–07–16 |
| URL: | https://d.repec.org/n?u=RePEc:isu:genstf:202107160700001130&r= |
| By: | Herings, P. Jean-Jacques (RS: GSBE Theme Data-Driven Decision-Making, RS: GSBE Theme Conflict & Cooperation, Microeconomics & Public Economics); Mauleon, Ana; Vannetelbosch, Vincent |
| Abstract: | We study the criminal networks that will emerge in the long run when criminals are neither myopic nor completely farsighted but have some limited degree of farsightedness. We adopt the horizon-K farsighted set of Herings, Mauleon and Vannetelbosch (2019) to answer this question. We find that in criminal networks with n criminals, the set consisting of the complete network is a horizon-K farsighted set whenever the degree of farsightedness of the criminals is larger than or equal to (n 1). Moreover, the complete network is the unique horizon-(n 1) farsighted set. Hence, the predictions obtained in case of completely farsighted criminals still hold when criminals are much less farsighted. |
| JEL: | A14 C70 D20 |
| Date: | 2021–05–04 |
| URL: | https://d.repec.org/n?u=RePEc:unm:umagsb:2021008&r= |
| By: | Áureo de Paula (Institute for Fiscal Studies and University College London) |
| Abstract: | This article provides a selective review on the recent literature on econometric models of network formation. The survey starts with a brief exposition on basic concepts and tools for the statistical description of networks. I then o?er a review of dyadic models, focussing on statistical models on pairs of nodes and describe several developments of interest to the econometrics literature. The article also presents a discussion of non-dyadic models where link formation might be in?uenced by the presence or absence of additional links, which themselves are subject to similar in?uences. This is related to the statistical literature on conditionally speci?ed models and the econometrics of game theoretical models. I close with a (non-exhaustive) discussion of potential areas for further development. |
| Date: | 2020–01–22 |
| URL: | https://d.repec.org/n?u=RePEc:ifs:cemmap:4/20&r= |
| By: | Sharat Ganapati; Woan Foong Wong; Oren Ziv |
| Abstract: | Entrepôts are hubs that facilitate trade between multiple origins and destinations. We study these entrepôts, the network they form, and their impact on international trade. We document that the trade network is a hub-and-spoke system, where 80% of trade is shipped indirectly—nearly all via entrepôts. We estimate indirect-shipping consistent trade costs using a model where shipments can be sent indirectly through an endogenous transport network and develop a geography-based instrument to estimate economies of scale in shipping. Counterfactual infrastructure improvements at entrepôts have on average ten times the global welfare impact of improvements at non-entrepôts. |
| JEL: | F10 F12 F14 |
| Date: | 2021–07 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:29015&r= |
| By: | Mingyuan Chen; Dakshina De Silva; Aurelie Slechten |
| Abstract: | Using BoardEx (2000{2017), we create a dynamic network connecting firms and board directors for the United States. We use the Environmental Protection Agency's Toxic Release Inventory to measure environmental performance at the director and rm-level. We examine how a candidate's environmental performance and networks affect director appointments. This allows us to endogenize the effect of directors' environmental experience when studying the impact on firms' chemical releases. We show that firms are likely to appoint influential directors with good environmental records and similar characteristics. Further, boards with good environmental performance and with diverse environmental backgrounds improve firms' environmental performance. |
| Keywords: | Network Formation, Firm Organization, Toxic Release, Board of directors |
| JEL: | D85 L21 Q5 |
| Date: | 2021 |
| URL: | https://d.repec.org/n?u=RePEc:lan:wpaper:332157256&r= |
| By: | Matthew Smith; Yasaman Sarabi |
| Abstract: | This study examines patterns of regionalisation in the International Trade Network (ITN). This study makes use of Gould Fernandez brokerage to examine the roles countries play in the ITN linking different regional partitions. An examination of three ITNs is provided for three networks with varying levels of technological content, representing trade in high tech, medium tech, and low-tech goods. Simulated network data, based on an advanced network model controlling for degree centralisation and clustering patterns, is compared to the observed data to examine whether the roles countries play within and between regions are result of centralisation and clustering patterns. The findings indicate that the roles countries play between and within regions is a result of centralisation and clustering patterns; indicating a need to examine the presence of hubs when investigating regionalisation and globalisation patterns in the modern global economy. |
| Date: | 2021–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2107.01696&r= |
| By: | Luke A. Boosey (Department of Economics, Florida State University); Christopher Brown (Krannert School of Management, Purdue University) |
| Abstract: | We study competitive behavior in all-pay Tullock (1980) contests with identity-dependent externalities (IDEs) governed by a fixed network. First, we introduce a model of network contest games, in which the prize generates an externality---which may be positive or negative---that impacts each player directly connected by the network to the winner of the contest. We establish existence of Nash equilibria and provide sufficient conditions for uniqueness, building on recent theoretical advances for games played on networks. We then derive closed-form results, with an intuitive characterization, for regular networks and for a subclass of core-periphery structures. Second, using a controlled laboratory experiment, we provide robust empirical support for the comparative statics predictions of the model. Our experimental findings also suggest that observed patterns of mean over-investment relative to point predictions may be driven by both heterogeneous joy of winning and social efficiency concerns that emerge in the presence of IDEs. Altogether, our study provides a novel application for the theory of network games, and new insights regarding behavior in all-pay contests. |
| Keywords: | contests, networks, identity-dependent externalities, network games, best-response potential, experiment, joy of winning |
| JEL: | C72 C92 D72 D74 D85 Z13 |
| Date: | 2021–07 |
| URL: | https://d.repec.org/n?u=RePEc:fsu:wpaper:wp2021_07_02&r= |