Networks, Shocks, and Systemic Risk

The Oxford Handbook on the Economics of Networks, Yann Bramoull´e, Andrea Galeotti, and Brian Rogers, eds., Oxford University Press, Forthcoming

MIT Department of Economics Working Paper No. 15-04

Columbia Business School Research Paper No. 15-24

38 Pages Posted: 22 Feb 2015

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science

Alireza Tahbaz-Salehi

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: January 27, 2015

Abstract

This chapter develops a unified framework for the study of how network interactions can function as a mechanism for propagation and amplification of microeconomic shocks. The framework nests various classes of games over networks, models of macroeconomic risk originating from microeconomic shocks, and models of financial interactions. Under the assumption that shocks are small, we provide a fairly complete characterization of the structure of equilibrium, clarifying the role of network interactions in translating microeconomic shocks into macroeconomic outcomes. This characterization enables us to rank different networks in terms of their aggregate performance. It also sheds light on several seemingly contradictory results in the prior literature on the role of network linkages in fostering systemic risk.

Keywords: Interaction networks, shock propagation, systemic risk.

JEL Classification: G01, D85

Suggested Citation

Acemoglu, Daron and Ozdaglar, Asuman E. and Tahbaz-Salehi, Alireza, Networks, Shocks, and Systemic Risk (January 27, 2015). The Oxford Handbook on the Economics of Networks, Yann Bramoull´e, Andrea Galeotti, and Brian Rogers, eds., Oxford University Press, Forthcoming, MIT Department of Economics Working Paper No. 15-04, Columbia Business School Research Paper No. 15-24, Available at SSRN: https://ssrn.com/abstract=2566990

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Asuman E. Ozdaglar

Massachusetts Institute of Technology (MIT) - Department of Electrical Engineering and Computer Science ( email )

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Alireza Tahbaz-Salehi

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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