risk sharing and contagion in networks 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

the formation of a core periphery structure in heterogeneous financial networks recent empirical evidence suggests that nancial networks exhibit a core periphery network structure this paper aims at giving an economic explanation for the emergence of such a structure using network formation theory focusing on intermediation benets we nd that a core periphery network cannot be unilaterally stable when agents are homogeneous the best response dynamics converge to a unique unilaterally stable outcome ranging from an empty to denser networks as the costs of linking decrease a core periphery network structure can form endogenously however if we allow for heterogeneity among agents in size we show that our model can reproduce the observed core periphery structure in the dutch interbank market for reasonable parameter values

hybrid revenue caps and incentive regulation abstract this paper analyzes the incentive effects of a hybrid revenue cap on a regulated monopolistic firm using non discriminatory two part pricing it is shown that the fixed and the variable part of the cap have different meanings in terms of regulation the fixed part of a hybrid revenue cap should be used to control the profit level of the regulated firm while the variable part should be used to control the social efficiency level since detailed information about the firm s cost function is required to determine the revenue cap parameters the overall conclusion is that revenue caps are a rather bad idea in the area of incentive regulation

trading in networks theory and experiments intermediation is a prominent feature of economic production and exchange two features of intermediation are salient coordination among traders between the source and the destination and competition between alternative combinations of intermediaries we develop a simple model to study these forces and we test the theoretical predictions in experiments our theoretical analysis yields a complete characterization of pricing equilibrium in networks there exist both ecient and inecient equilibria suggesting a key role of coordination among intermediaries strategic interaction leads to either buyer and seller retaining all surplus or intermediaries extracting all surplus we develop conditions on network structure under which these di erent extremal outcomes arise respectively laboratory experiments show that eciency prevails in almost all cases so traders are successful in coordination subjects coordinate on extreme surplus division finally experiments highlight the role of network structure in determining pricing and the

dynamics of networks if everyone strives for structural holes when entrepreneurs enter structural holes in networks they can exploit the related benefits evidence for these benefits has steadily accumulated the authors ask whether those who strive for such structural advantages can maintain them if others follow their example burt speculates that they cannot but a formal demonstration of this speculation is lacking using a game theoretic model of network formation the authors characterize the networks that emerge when everyone strives for structural holes they find that the predominant stable networks distribute benefits evenly confirming that no one is able to maintain a structural advantage in the long run

segregation in friendship networks we analyze a network formation model where agents belong to different communities both individual benefits and costs depend on direct as well as indirect connections benefits of an indirect connection decrease with distance in the network while the cost of a link depends on the type of agents involved two agents from the same community always face a low linking cost while the cost of forming a relationship between two agents from different communities diminishes with the rate of exposure of each of them to the other community we find that socialization among the same type of agent can be weak even if the cost of maintaining links within one s own type is very low our model also suggests that policies aimed at reducing segregation are socially desirable only if they reduce the within community cost differential by a sufficiently large amount

do consumers benefit from tighter price cap regulation abstract this paper examines whether consumers necessarily benefit from tightening the price cap we find that a tighter price cap always increases consumer welfare when demands are independent conversely when demands are interdependent a tighter price cap may reduce consumer welfare

slippage in the conservation reserve program or spurious correlation a rejoinder the conservation reserve program crp pays farmers about 2 billion per year to retire cropland under ten to fifteen year contracts recent research by wu found that slippage an unintended stimulus of new plantings offsets some of crp s environmental benefits wu does not account for the endogeneity of crp enrollments furthermore the data used by wu cannot be used to estimate slippage arising from a price feedback effect we replicate wu s findings demonstrate the possible presence of spurious correlation and construct new estimates with corrections for endogeneity and other econometric problems we find no convincing evidence of slippage

a theory of buyer seller networks this paper introduces a new model of exchange networks rather than markets of buyers and sellers it begins with the empirically motivated premise that a buyer and seller must have a relationship a link to exchange goods networks buyers sellers and the pattern of links connecting them are common exchange environments this paper develops a methodology to study network structures and explains why agents may form networks in a model that captures characteristics of a variety of industries the paper shows that buyers and sellers acting strategically in their own self interests can form the network structures that maximize overall welfare

rules of thumb for social learning this paper studies agents who consider the experiences of their neighbors in deciding which of two technologies to use we analyze two learning environments one in which the same technology is optimal for all players and another in which each technology is better for some of them in both environments players use exogenously specified rules of thumb that ignore historical data but may incorporate a tendency to use the more popular technology in some cases these naive rules can lead to fairly efficient decisions in the long run but adjustment can be slow when a superior technology is first introduced

job information networks neighborhood effects and inequality this paper explores the theoretical and empirical literature to examine the use by different social groups of informal sources of information provided by friends relatives and acquaintances during job search and its consequences for the job market it also addresses the role of network structure and size the resource endowments of contacts and nature of the links between contacts to explain differences in the effects of job information networks in doing so the paper also turns to the sociology literature on job information networks and provides an economic perspective on such sociological concepts as strong versus weak ties inbreeding distance from structural holes etc the paper distinguishes between models of exogenous job information networks that is where individuals obtain job related information through a given social structure and endogenous job information networks which are social networks that result from individuals uncoordinated actions the paper pays special attention to such issues as physical and social proximity and sharing of information and discusses them in the context of the recent social interactions and neighborhood effects literature finally the paper outlines a model that integrates job information networks where interactions occur in business cycle frequencies with the dynamics of human capital formation which include the joint effects of parental community and neighborhood human capital and are set in life cycle frequencies for the purpose of organizing suggestions for future research and examining earned income inequality

r d networks we develop a model of strategic networks that captures two distinctive features of interfirm collaboration bilateral agreements and nonexclusive relationships our analysis highlights the relationship between market competition firms incentives to invest in r d and the architecture of collaboration networks in the absence of firm rivalry the complete network where each firm collaborates with all others is uniquely stable industry profit maximizing and efficient by contrast under strong market rivalry the complete network is stable but intermediate levels of collaboration and asymmetric networks are more attractive from a collective viewpoint this suggests that competing firms may have excessive incentives to form collaborative links

transportation and storage under a dynamic price cap regulation process abstract we study the welfare effects of price cap regulation pcr and the strategic behavior it may induce in gas transportation networks by analyzing a stylized gas network within the framework of a multi period game model under three scenarios no regulation a dynamic setting where the price cap adjustment mechanism is not endogenized by the players and a dynamic setting where it is endogenized by the players

tighter average revenue regulation can reduce consumer welfare a monopolist producing for two markets is subject to an average revenue constraint a form of regulation which is relevant to some u k utilities where marginal costs of serving the two markets differ tighter regulation may cause one of the prices to rise as shown by i bradley and c price 1988 a simple linear example demonstrates that total consumer surplus may fall as regulation becomes more stringent copyright 1995 by blackwell publishing ltd

trade expansion and contract enforcement consider a world of traders separated in geographic economic or social space honest trade offers larger gains for more distant traders but frequencies of meetings and information flows about cheating have local bias honesty is self enforcing only between pairs of sufficiently close neighbors global honesty prevails only in a sufficiently small world the extent of self enforcing honesty is likely to decrease when the world expands beyond this size costly external enforcement is useful only if the world is sufficiently large and its net payoff need not be larger than that of a self governing small community intermediate size worlds fare worst

trust and social collateral this paper builds a theory of trust based on informal contract enforcement in social networks in our model network connections between individuals can be used as social collateral to secure informal borrowing we define network based trust as the largest amount one agent can borrow from another agent and derive a reduced form expression for this quantity which we then use in three applications 1 we predict that dense networks generate bonding social capital that allows transacting valuable assets whereas loose networks create bridging social capital that improves access to cheap favors such as information 2 for job recommendation networks we show that strong ties between employers and trusted recommenders reduce asymmetric information about the quality of job candidates 3 using data from peru we show empirically that network based trust predicts informal borrowing and we structurally estimate and test our model

structural holes in social networks we consider a setting where every pair of players that undertake a transaction e g exchange goods or information creates a unit surplus a transaction can take place only if the players involved have a connection if the connection is direct the two players split the surplus equally while if it is indirect then intermediate players also get an equal share of the surplus thus individuals form links with others to create surplus to gain intermediation rents and to circumvent others who are trying to become intermediary our analysis clarifies the interplay between these forces in the process of strategic network formation first we show that in the absence of capacity constraints on links it leads to the emergence of a star network where a single agent acts as an intermediary for all transactions and enjoys significantly higher payoffs second we study the implications of capacity constraints in the ability of agents to form links in this case distances between players must be long which induces players who are far off to connect in order to avoid paying large intermediation rents a cycle network then emerges payoffs being equal across all players

the relative burden of monopoly on households with different incomes this paper examines the relative burden of monopoly measured as the static loss of con sumers surplus for different household income levels australian household expenditure survey data are used to generate demand elasticities for 14 commodity groups and to obtain estimates of the relative welfare loss for households with different income levels the welfare loss associated with monopoly power is found to be higher for low income households such as households that depend on government pensions and benefits for their principal source of income compared with high income households the results provide an indication that what ever the size of the absolute welfare loss arising from monopoly there may be a substantial effect on the distribution of welfare this paper examines the relationship between the level of household income and the burden of monopoly while there have been numerous studies of the aggregate welfare losses associated with monopoly the relationship between welfare loss and household income has not previously been examined the approach taken in this paper involves combining the static net consumers loss method of assessing the cost of nmonopoly with a method of linking demand elasticities to income levels welfare loss is aggregated over commodity groups for households at different income levels and the loss of consumers surplus is then compared with households in other income groups the reason for emphasizing the relative measure of welfare loss is that a number of problematic assumptions are made in the course of the analysis they are made explicit at each point in the argument and impart some bias into the absolute measure of welfare loss for any income group however it is suggested that the bias is similar for all income groups so that the measures of relative welfare loss presented in the paper are not affected section i begins by discussing the standard method of identifying the static welfare loss associated with monopoly and shows that under certain assump tions this loss is inversely proportional to the own price elasticity of demand the section then shows how this result can be used to investigate the relation ship between welfare loss and household income section ii uses data from the australian household expenditure survey and shows how in the absence of direct evidence on the price elasticities of demand cross sectional information on the composition of household expenditure can be used to generate a set of estimates of the relative welfare loss for households with different levels of

the economic regulation of private industries by price constraints regulation of some newly privatised industries in the uk has been implemented by restricting annual price increases this paper analyses the two forms which such regulation has taken the tariff basket approach applied to british telecom and the average revenue constraint imposed upon british gas and the british airports authority the incentives given by the tariff basket constraint to a profit maximiser are likely to result in a more efficient price structure than would occur under an average revenue constraint demonstrating that the former is generally a superior form of regulation

tight average revenue regulation can be worse than no regulation price regulation of a multi market monopolist with the cap based on average revenue can cause welfare to be below the unregulated level in a model with linear demands and constant but unequal marginal costs a sufficient condition for this welfare effect is that the cap equals the average revenue that would be earned with marginal cost pricing relaxation of the price cap can lower all prices welfare with uniform pricing at the level of the price cap can be above or below the average revenue welfare level

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

the effects of social networks on employment and inequality we develop a model where agents obtain information about job opportunities through an explicitly modeled network of social contacts we show that employment is positively correlated across time and agents moreover unemployment exhibits duration dependence the probability of obtaining a job decreases in the length of time that an agent has been unemployed finally we examine inequality between two groups if staying in the labor market is costly and one group starts with a worse employment status then that group s drop out rate will be higher and their employment prospects will be persistently below that of the other group

welfare effects of price discrimination by a regulated monopolist should a multiproduct monopolist whose average price is capped by regulation be allowed to engage in third degree price discrimination if the cap applies to a price index with weights proportional to demands at uniform prices then price discrimination benefits consumers as well as the firm but if perhaps more realistically it is the firm s average revenue that is capped then consumers prefer uniform pricing in this case total output is higher when discrimination is allowed which increases welfare but marginal utilities differ across markets which is inefficient and the overall effect is ambiguous a small amount of discrimination is desirable however it is better not to allow price discrimination if the price cap is close to the level of marginal cost the consequences of tightening the price cap when discrimination is allowed are also examined

pricing natural gas distribution in mexico abstract we examine regulation of distribution tariffs in the mexican natural gas industry average revenue in each period is constrained not to exceed an upper bound and is calculated as the ratio of total revenue to output in the current period this regime implies incentives for strategically setting two part tariffs the usage charge is typically dropped to its lowest feasible level while the fixed charge is raised to compensate for the loss of profit the regime also creates a stochastic effect that implies decreased values of consumer surplus for lower levels of risk aversion and uncertainty