The Distribution of Multipliers in a Networked Economy and Topology-Induced Negative Multipliers

68 Pages Posted: 15 Dec 2018

See all articles by Janelle Schlossberger

Janelle Schlossberger

Harvard University, Harvard Faculty of Arts and Sciences, Department of Economics, Students

Date Written: November 28, 2018

Abstract

We have a collection of N agents and an outside entity that is interested in the population's aggregate action. The outside entity would like to enact a policy with the intention of increasing the aggregate action; for example, if the outside entity were a national government, it might be interested in enacting a policy that increases aggregate output and stimulates economic growth. The policy of the outside entity allocates epsilon > 0 units of additional wealth to n <= N agents, funded either by internal transfer or by an external source. Our outside entity would like to know the exact effect of its planned policy on the aggregate action, and it would like to know the corresponding economic multiplier, that is, the change in the aggregate action from the epsilon shock. Now, even though the setting is simple, the effect is complicated: the population of agents is networked; agents' actions are interdependent, so depending on which subset of agents actually receives the positive shock, the change in the aggregate action and the corresponding economic multiplier can both widely differ. In this work, we consider three broad settings with network-based interaction: (1) networked environments with strategic complements and substitutes, (2) networked environments with coordination and anti-coordination, and (3) networked environments with production. We show how there is an entire distribution of possible aggregate actions and economic multipliers associated with a particular policy: given n, for each environment, we map the topology of agents' interaction network to the distribution of possible resulting aggregate actions and economic multipliers. The mathematics is the same across all three environments. We can compute the features of these distributions in closed-form, including the maximum and minimum possible aggregate actions and economic multipliers for a particular network topology. We can also rank networks so that the outside entity's policy is more effective the higher ranked the network. We show how non-trivial network topologies generate negative multipliers. Across all three settings, there is a non-zero probability that the enacted policy will reduce the aggregate action below its no-intervention level, and we can compute this probability in closed form.

Keywords: network, economic multiplier, configuration, distribution, stimulus, transfers, strategic complements and substitutes, coordination and anti-coordination, production networks

JEL Classification: D85, E60, H30, C40, C60

Suggested Citation

Schlossberger, Janelle, The Distribution of Multipliers in a Networked Economy and Topology-Induced Negative Multipliers (November 28, 2018). Available at SSRN: https://ssrn.com/abstract=3292646 or http://dx.doi.org/10.2139/ssrn.3292646

Janelle Schlossberger (Contact Author)

Harvard University, Harvard Faculty of Arts and Sciences, Department of Economics, Students ( email )

Cambridge, MA
United States

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