Liquidity, Financial Centrality, and the Value of Key Players / Arun G. Chandrasekhar, Robert Townsend, Juan Pablo Xandri.

Format:

Book

Author/Creator:

Chandrasekhar, Arun G.

Contributor:

National Bureau of Economic Research.

Townsend, Robert.

Xandri, Juan Pablo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w30270.

NBER working paper series no. w30270

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

Consider an economy in which agents face income risk but interact in a stochastic financial network where the randomness is dictated by both chance and choice. We study the financial centrality of an agent defined as the ex-ante marginal social value of providing a small liquid asset to that agent. We show financially central agents are not only those who are linked often, but are more likely to be linked when (i) the realized network is fragmented, (ii) income risk is high, (iii) shocks are positively correlated, (iv) attitudes toward risk are more sensitive in the aggregate, and (v) there are tail risks. We apply our framework to models of financial markets with participation shocks, supply chains subject to disruptions, and village risk-sharing networks. We also study how the stochastic financial network structure influences bargaining, thereby endogenizing Pareto weights in the planner's problem. Evidence from Thai villages is consistent with these bargaining foundations, showing that agents who are more central indeed receive greater Pareto weight. We conclude by examining the welfare consequences of targeting larger liquid assets to key traders in markets, and to the most liquidity-sensitive links in supply chains.

Notes:

Print version record

July 2022.