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Ulric B. and Evelyn L. Bray Social Sciences Seminar

Wednesday, April 24, 2024
4:00pm to 5:00pm
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Baxter B125
Optimal Bailouts in Diversified Financial Networks
Rakesh Vohra, George A. Weiss and Lydia Bravo Weiss University Professor, Department of Economics and the Department of Electrical and Systems Engineering, University of Pennsylvania,

Abstract: Widespread default involves substantial deadweight costs. To counter them, a regulator can inject capital into failing firms. These injections have positive spillovers that can trigger a repayment cascade. But which firms should the regulator bailout so as to minimize the total injection of capital while ensuring solvency of all firms? While the problem is, in general, NP-hard, for networks that arise from a stochastic block model, we show that the optimal bailout can be implemented by a simple index policy in which a firm index depends only on its characteristics and its position in the network. Specific examples of the setting include core-periphery networks.

Written with Krishna Dasaratha and Santosh S. Venkatesh.

For more information, please contact Letty Diaz by phone at 626-395-1255 or by email at [email protected].