Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96885
Authors: 
Cabrales, Antonio
Gottardi, Piero
Vega-Redondo, Fernando
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 4715
Abstract: 
We investigate the trade-off between the risk-sharing gains enjoyed by more interconnected firms and the costs resulting from an increased risk exposure. We find that when the shock distribution displays “fat” tails, extreme segmentation into small components is optimal, while minimal segmentation and high density of connections are optimal when the distribution exhibits “thin” tails. For less regular distributions, intermediate degrees of segmentation and sparser connections are optimal. Also, if firms are heterogeneous, optimality requires perfect assortativity in a component. In general, however, a conflict arises between efficiency and pairwise stability, due to a “size externality” not internalized by firms.
Subjects: 
firm networks
contagion
risk sharing
JEL: 
D85
C72
G21
Document Type: 
Working Paper

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