Allouch, Nizar and Jalloul, Maya and Duncan, Alfred (2023) Strategic default in financial networks. Games and Economic Behavior, 142. pp. 941-954. ISSN 0899-8256
Full text not available from this repository.Abstract
This paper investigates a model of default in financial networks where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Furthermore, we develop an algorithm to find all Nash equilibria and guide regulatory intervention that relies on the financial network structure. The algorithm provides a ranking for the set of Nash equilibria for specific financial network structures, which can serve as a measure of systemic risk. Finally, we show that introducing a central clearing counterparty achieves the efficient equilibrium at no additional cost.