Three essays in Financial Networks and Games

Chapter 1: Default and Punishment with Systemic Risk: This essay identifies substituting behaviors in an ex-ante financial system with cyclical default/feedback leading to potential breakdown. Here, firms in a debt network estimate potential default and as such, makes storage decision in order to avoid defaulting. They make these decision due to the potential damages associated with defaults. In doing so, firms optimize their savings strategy given their network/neighborhood effect. We observe properties and existence of a Nash equilibrium under instances where such ex-ante breakdown are caused in part by each owing firm. Equilibrium storage is dominated by the fraction of default not attributed to contagion. We also see a link between firms position in a default network and its storage. As a policy tool, equilibrium under harsh punishment are also socially efficient in achieving minimal default and systemic breakdown.

Chapter 2: Frictions in Financial Networks: This essay models transaction cost within an Eisenberg and Noe (2001) clearing

system and identifies such clearing properties such as existence, uniqueness and methods of clearing. Further more, it adapts such transaction cost for decision making into the Demange (2016)'s threat index with default feedback and observes the behavior of the index/centrality rankings of each under changing transaction costs. We find under strict conditions, existential possibilities of switching in such rankings for firms involved.

Chapter 3: Strategic Interactions in Financial Networks: This essay models interactions of firms in a pre-trading(fixed network of lending/ borrowing) period whereby firms set fixed lending rates given loan management cost. We show strategic substitution in the rate each firm sets and more fundamentally, propose that the rates charged to debtors by a creditor firm is likened to results from a private provision of public good in networks game. We then highlight specific core-periphery network properties in relation to interdependence and Nash rate charged by firms. For welfare policies, we find neutrality of intervention policies that create or reduce transaction cost and improvement based on policies that provide administrative subsidies thus creating an avenue for cost effective resource transfer policy. Lastly, we find significant relationship between a firms centrality measured by weaker negative externality and welfare improvement due to such subsidy.