Optimal Bailouts in Diversified Financial Networks
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arXiv
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| Format: | Preprint |
| Published: |
2024
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| _version_ | 1866909226943643648 |
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| author | Dasaratha, Krishna Venkatesh, Santosh Vohra, Rakesh |
| author_facet | Dasaratha, Krishna Venkatesh, Santosh Vohra, Rakesh |
| contents | Widespread default involves substantial deadweight costs which could be countered by injecting capital into failing firms. Injections have positive spillovers that can trigger a repayment cascade. But which firms should a regulator bailout so as to minimize the total injection of capital while ensuring solvency of all firms? While the problem is, in general, NP-hard, for a wide range of networks that arise from a stochastic block model, we show that the optimal bailout can be implemented by a simple policy that targets firms based on their characteristics and position in the network. Specific examples of the setting include core-periphery networks. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2406_12818 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Optimal Bailouts in Diversified Financial Networks Dasaratha, Krishna Venkatesh, Santosh Vohra, Rakesh Theoretical Economics Social and Information Networks Widespread default involves substantial deadweight costs which could be countered by injecting capital into failing firms. Injections have positive spillovers that can trigger a repayment cascade. But which firms should a regulator bailout so as to minimize the total injection of capital while ensuring solvency of all firms? While the problem is, in general, NP-hard, for a wide range of networks that arise from a stochastic block model, we show that the optimal bailout can be implemented by a simple policy that targets firms based on their characteristics and position in the network. Specific examples of the setting include core-periphery networks. |
| title | Optimal Bailouts in Diversified Financial Networks |
| topic | Theoretical Economics Social and Information Networks |
| url | https://arxiv.org/abs/2406.12818 |