Contagion in Stable Networks

32 Pages Posted: 26 Oct 2017

See all articles by Spiros Bougheas

Spiros Bougheas

University of Nottingham - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 16, 2017

Abstract

We study the formation of networks in environments where agents derive benefits from other agents directly linked to them but suffer losses through contagion when any agent on a path connected to them is hit by a shock. We first consider networks with undirected links (e.g. epidemics, underground resistance organizations, trade networks) where we find that stable networks are comprised of completely connected disjoint subnetworks. Then, we consider networks with directed links and we find that the completely connected network is stable, although, its exact structure, and thus contagion implications, is sensitive to parameter values for costs and benefits. Lastly, we introduce aggregate externalities (e.g. fire sales for the case of financial networks) and we find that stable networks can be asymmetric, connected but not completely connected, thus capturing the main features of inter-industry and financial networks.

Keywords: Network Formation, Stability, Contagion

JEL Classification: C720, D850

Suggested Citation

Bougheas, Spiros, Contagion in Stable Networks (October 16, 2017). CESifo Working Paper Series No. 6682. Available at SSRN: https://ssrn.com/abstract=3059503

Spiros Bougheas (Contact Author)

University of Nottingham - School of Economics ( email )

University Park
Nottingham, NG7 2RD
United Kingdom

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