Business Fluctuations and Bankruptcy Avalanches in an Evolving Network Economy

Stiglitz, Joseph E.; Greenwald, Bruce C.; Delli Gatti, Domenico; Gallegati, Mauro; Russo, Alberto

We analyze the properties of a three-sector network economy characterized by credit relationships connecting downstream and upstream firms (inside credit) and credit relationships connecting firms and banks (outside credit). The network topology changes over time due to an endogenous process of partner selection (the preferred-partner choice rule). The output of simulations shows that a business cycle at the macroeconomic level can develop as a consequence of the complex interaction of the heterogeneous financial conditions of the agents involved. In this paper, we focus on the emergence of bankruptcy crises: the bankruptcy of one agent can bring about the bankruptcy of one or more other agents in a snowball effect of more or less large size, depending on the network structure and the incidence of non-performing loans on balance sheets of agents involved.



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Journal of Economic Interaction and Coordination

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March 28, 2013