Networks, Shocks, and Systemic Risk
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.
Prepared for The Oxford Handbook on the Economics of Networks, Yann Bramoullé, Andrea Galeotti, and Brian Rogers (Eds), Oxford University Press. Acemoglu and Ozdaglar gratefully acknowledge financial support from the Army Research Office, Grant MURI W911NF-12-1-0509. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Networks, Shocks, and Systemic Risk (with Daron Acemoglu and Asuman Ozdaglar) The Oxford Handbook of the Economics of Networks, Chapter 21, 569-607, 2016 Edited by Yann Bramoulle, Andrea Galeotti, and Brian Rogers.