Network Formation in the Presence of Contagious Risk
- 1 May 2013
- journal article
- research article
- Published by Association for Computing Machinery (ACM) in ACM Transactions on Economics and Computation
- Vol. 1 (2), 1-20
- https://doi.org/10.1145/2465769.2465771
Abstract
There are a number of domains where agents must collectively form a network in the face of the following trade-off: each agent receives benefits from the direct links it forms to others, but these links expose it to the risk of being hit by a cascading failure that might spread over multistep paths. Financial contagion, epidemic disease, the exposure of covert organizations to discovery, and electrical power networks are all settings in which such issues have been articulated. Here we formulate the problem in terms of strategic network formation, and provide asymptotically tight bounds on the welfare of both optimal and stable networks. We find that socially optimal networks are, in a precise sense, situated just beyond a phase transition in the behavior of the cascading failures, and that stable graphs lie slightly further beyond this phase transition, at a point where most of the available welfare has been lost. Our analysis enables us to explore such issues as the trade-offs between clustered and anonymous market structures, and it exposes a fundamental sense in which very small amounts of “over-linking” in networks with contagious risk can have strong consequences for the welfare of the participants.Keywords
Funding Information
- Yahoo Research Alliance
- Office of Naval Research (N00014-98-1-0589)
- John D. and Catherine T. MacArthur Foundation
- Air Force Office of Scientific Research (FA9550-09-1-0100)
- Division of Computing and Communication Foundations (CCF-0325453, IIS-0910664, CCF-0910940, CCF-0643934, CCF-0729006)
- Vienna Science and Technology Fund
This publication has 23 references indexed in Scilit:
- Resilience to Contagion in Financial NetworksSSRN Electronic Journal, 2010
- Networks in FinanceSSRN Electronic Journal, 2008
- Percolation on finite graphs and isoperimetric inequalitiesThe Annals of Probability, 2004
- Near-optimal network design with selfish agentsPublished by Association for Computing Machinery (ACM) ,2003
- The influence modelIEEE Control Systems, 2001
- A Noncooperative Model of Network FormationEconometrica, 2000
- The Probabilistic MethodPublished by Wiley ,2000
- Financial ContagionJournal of Political Economy, 2000
- Emergence of Scaling in Random NetworksScience, 1999
- The asymptotic number of labeled graphs with given degree sequencesJournal of Combinatorial Theory, Series A, 1978