Systemic Risk and Network Formation (LIDS-SSRC Seminar)

This seminar will introduce a model of endogenous network formation and systemic risk in which strategic agents form networks that efficiently trade off the possibility of systemic risk with the benefits of trade. Efficiency is a consequence of the high risk of contagion, which forces agents to endogenies their externalities. Second, fundamentally safer economies generate much higher interconnectedness, which in turn leads to higher systemic risk. Third, the structure of the network formed depends on whether the shocks to the system are believed to be correlated or independent. This underlines the importance of specifying the shock structure before investigating a given network because a particular network and shock structure could be incompatible.