Research Repository

Risk Sharing and Contagion in Networks

Cabrales, Antonio and Gottardi, Piero and Vega-Redondo, Fernando (2017) 'Risk Sharing and Contagion in Networks.' The Review of Financial Studies, 30 (9). 3086 - 3127. ISSN 0893-9454

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We investigate the socially optimal design of financial networks, that allows to tackle the trade-off between risk sharing and contagion. We identify conditions on the shock distribution under which full integration or maximal segmentation is optimal. We also show that, under different conditions, the optimal network displays different levels of strength of linkages to other firms or intermediate degrees of segmentation. In the latter case, the individual and social incentives to establish linkages are not necessarily aligned. When firms face heterogeneous distributions of risks, they should optimally form linkages only with firms facing risks of the same kind.

Item Type: Article
Uncontrolled Keywords: D85, C72, G21
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Elements
Date Deposited: 18 Sep 2019 11:33
Last Modified: 18 Sep 2019 11:33

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