Risk-Sharing and the Creation of Systemic Risk

We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier. Financial innovations facilitate hedging idiosyncratic risks among agents; however, aggregate risks can be hedged only with liquid assets. When risk-sharing is primitive, agents self-hedge and hold more liquid assets; this buffers aggregate risks, resulting in few correlated failures compared to when there is greater risk sharing. We apply this insight to build a model of a clearinghouse to show that as risk-sharing improves, aggregate liquidity falls but correlated failures rise. Public liquidity injections, for example, in the form of a lender-of-last-resort can reduce this systemic risk ex post, but induce lower ex-ante levels of private liquidity, which can in turn aggravate welfare costs from such injections.

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Understanding competition in digital markets: new perspectives on old practices

Competition Law Journal ◽

10.4337/clj.2021.03.04 ◽

2021 ◽

Vol 20 (3) ◽

pp. 139-145

Author(s):

Andrew Mell ◽

Gareth Shier

Keyword(s):

Economic Theory ◽

Industrial Organization ◽

Competition Policy ◽

Business Practices ◽

Policy Tools ◽

Digital Ecosystems ◽

Online Platforms ◽

Ex Post ◽

The World ◽

Ex Ante

Around the world, competition agencies and academics alike have raised concerns that the existing suite of policy tools and economic theory fail to capture all of the harms that can arise in digital markets. At the same time, other academics and practitioners consider that competition policy and industrial organization is unable to account for many of the benefits that online platforms and digital ecosystems can bring. As a range of new interventions – ranging from strengthened ex-post enforcement tools to new ex-ante regulations – are being proposed, we ask which view is right? Are the business practices observed in digital markets and targeted by these reforms so obviously harmful that they are deserving of a return to form-based prohibitions in place of effects-based analysis? Or does this represent an unhelpful regression, based on a misunderstanding of how these new types of markets function?

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Global Coordination against Global Warning: “Catch-up” Countries against Affluent Countries

Sustainability in Environment ◽

10.22158/se.v2n1p82 ◽

2017 ◽

Vol 2 (1) ◽

pp. 82

Author(s):

Jan-Erik Lane

Keyword(s):

Climate Change ◽

Policy Making ◽

Time Frame ◽

Ex Post ◽

Global Warning ◽

The World ◽

Ex Ante ◽

Long Time ◽

Catch Up ◽

Global Coordination

The UNFCCC has delivered the COP21 project as the main response to climate change, promising radical decarbonisation of the country economies in the world. A promise is merely a verbal commitment ex ante, whereas the outcomes of policy-making and government coordination inform about the actual matters of fact ex post. Scholars now fear that there will be reneging or defection in the COP21 games to be started now with a long time frame into the next half of this century. Thus, world famous Stern (2016) asks what we are waiting for, given his stern warnings already in 2007. And Conca (2015) suggests that environmentalism and climate change becomes the chief task for the United Nations, on par with peace, security, human rights and development. Star economist Sachs (2015a, b, c) promotes the idea of linking anti-global warming policies with general Sustainable Development (SDGs), including anti-poverty policies. Yet, they bypass fundamentals: climate change is driven by Juggernaut forces, namely the links between GDP, energy consumption and greenhouse gases involving the economic struggle between the haves and have-nots. The challenges in implementing the COP21 goals (I+III) are formidable.

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From ex ante to ex post risk sharing: cost-effectiveness, unfairness and adverse selection in mutual aid

SSRN Electronic Journal ◽

10.2139/ssrn.3925904 ◽

2020 ◽

Author(s):

Ze Chen ◽

Runhuan Feng ◽

Li Wei ◽

Jiaqi Zhao

Keyword(s):

Cost Effectiveness ◽

Adverse Selection ◽

Risk Sharing ◽

Mutual Aid ◽

Ex Post ◽

Ex Ante

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Informal Insurance Networks

The B E Journal of Theoretical Economics ◽

10.1515/bejte-2015-0006 ◽

2016 ◽

Vol 16 (2) ◽

Author(s):

Wayne Yuan Gao ◽

Eunyoung Moon

Keyword(s):

Risk Sharing ◽

Individual Risk ◽

Income Shocks ◽

Regular Structures ◽

Ex Post ◽

Ex Ante ◽

Income Shock ◽

Informational Constraint ◽

Parameter Values ◽

Stable Network

AbstractThis paper develops a model of risk sharing in which each individual’s income shock is locally shared ex-post given an ex-ante strategically formed network. Emphasizing the informational constraint of the network such that transfers can only be contingent on local information, the model provides characterizations of the ex-ante efficient network and the pairwise stable networks. While it is no surprise that the unique efficient network is the complete graph, it is interesting that any pairwise stable network features low average degree and almost 2-regular structures, even under individual risk heterogeneity, and it tends to exhibit positive assortativity in terms of risk variances. If expected incomes are also locally shared in addition to income shocks, the pairwise stable network may become more densely connected, achieving efficiency under certain parameter values.

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Network effects, cascades and CCP interoperability

International Journal of Modern Physics C ◽

10.1142/s0129183114500351 ◽

2014 ◽

Vol 25 (09) ◽

pp. 1450035

Author(s):

Xiaobing Feng ◽

Haibo Hu ◽

Matthew Pritsker

Keyword(s):

Systemic Risk ◽

Risk Sharing ◽

Network Effects ◽

Threshold Value ◽

Cascading Failures ◽

Counterparty Risk ◽

Financial Regulations ◽

Logistic Mapping ◽

The World ◽

Near Term

To control counterparty risk, financial regulations such as the Dodd Frank Act are increasingly requiring standardized derivatives trades to be cleared by central counterparties (CCPs). It is anticipated that in the near-term future, CCPs across the world will be linked through interoperability agreements that facilitate risk-sharing but also serve as a conduit for transmitting shocks. This paper theoretically studies a network with CCPs that are linked through interoperability arrangements, and studies the properties of the network that contribute to cascading failures. The magnitude of the cascading is theoretically related to the strength of network linkages, the size of the network, the logistic mapping coefficient, a stochastic effect and CCP's defense lines. Simulations indicate that larger network effects increase systemic risk from cascading failures. The size of the network N raises the threshold value of shock sizes that are required to generate cascades. Hence, the larger the network, the more robust it will be.

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Financial Stability, Systemic Risk, and Taxpayers’ Money—The Rationale for a Special Resolution Regime

Resolution and Insolvency of Banks and Financial Institutions ◽

10.1093/oso/9780198703587.003.0004 ◽

2016 ◽

Author(s):

Michael Schillig

Keyword(s):

Moral Hazard ◽

Market Efficiency ◽

Financial Institutions ◽

Systemic Risk ◽

Financial Stability ◽

Financial System ◽

System Stability ◽

Cross Border ◽

Ex Post ◽

Ex Ante

Special resolution regimes are generally introduced with the objective of helping to ‘maintain financial stability, minimize systemic risk, protect consumers, limit moral hazard and promote market efficiency’. The recurring themes are financial stability, systemic risk, and taxpayers’ exposure to losses. This chapter explores whether and to what extent a special resolution regime for banks and financial institutions can contribute to the enhancement of financial (system) stability and can limit systemic risk. It seeks to clarify these concepts and discusses possible ex ante incentives that a (recovery and) resolution regime may provide for controlling systemic risk. Further, it focuses on ex post remedies for the curtailment of systemic risk, and considers the international and cross-border implications.

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“Utopia First!” A Machiavellian Conception of Solidarity in More's Utopia

Moreana ◽

10.3366/more.2018.0031 ◽

2018 ◽

Vol 55 (Number 209) (1) ◽

pp. 79-93

Author(s):

Marie-Claire Phélippeau

Keyword(s):

At Risk ◽

Human Beings ◽

Farm Work ◽

The World ◽

Social Difficulties ◽

The Republic ◽

The Individual ◽

Democratic Elections ◽

Communal Organization

This paper shows how solidarity is one of the founding principles in Thomas More's Utopia (1516). In the fictional republic of Utopia described in Book II, solidarity has a political and a moral function. The principle is at the center of the communal organization of Utopian society, exemplified in a number of practices such as the sharing of farm work, the management of surplus crops, or the democratic elections of the governor and the priests. Not only does solidarity benefit the individual Utopian, but it is a prerequisite to ensure the prosperity of the island of Utopia and its moral preeminence over its neighboring countries. However, a limit to this principle is drawn when the republic of Utopia faces specific social difficulties, and also deals with the rest of the world. In order for the principle of solidarity to function perfectly, it is necessary to apply it exclusively within the island or the republic would be at risk. War is not out of the question then, and compassion does not apply to all human beings. This conception of solidarity, summed up as “Utopia first!,” could be dubbed a Machiavellian strategy, devised to ensure the durability of the republic. We will show how some of the recommendations of Realpolitik made by Machiavelli in The Prince (1532) correspond to the Utopian policy enforced to protect their commonwealth.

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