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Epidemics of rules, information aggregation failure and market crashes

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  • Kartik Anand

    (The Abdus Salam International Center for Theoretical Physics - The Abdus Salam International Center for Theoretical Physics - Commencez à saisir le nom d'un établissementThe Abdus Salam International Center for Theoretical Physics)

  • Alan Kirman

    ()
    (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - CNRS : UMR6579)

  • Matteo Marsili

    (The Abdus Salam International Centre for Theoretical Physics - ICTP Trieste)

Abstract

This short paper argues that rationally motivated coordination between agents is an important ingredient to understand the current economic crisis. We argue that changes in parameters that model the structure of a macro-economy or financial markets are not exogenous but arise as agents adopt rules that appear to be the norm around them. For example, if a rule is adopted by the majority of ones' neighbors it will become acceptable or, alternatively, if agents learn that changing their rule leads to greater gains, they will modified their rules. However, as rules develop and spread they may have consequences at the aggregate level which are not anticipated by individuals. These rules may be adopted by implicit consensus as they turn out to be profitable for individuals, but they may also weaken the constraints imposed by regulators. Indeed, the emergence of new rules or the modification of old ones may render the whole system more fragile, which may then cease to function. To illustrate this we develop a simple model, motivated by the 2007-2008 crisis in credit derivatives markets, to show how coordination on simple and apparently profitable rules may cause a market to collapse.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00545144.

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Date of creation: 09 Dec 2010
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Handle: RePEc:hal:wpaper:halshs-00545144

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Related research

Keywords: Coordination; economic crisis; economic rules; information aggregation;

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Cited by:
  1. Stiglitz Joseph E., 2010. "Contagion, Liberalization, and the Optimal Structure of Globalization," Journal of Globalization and Development, De Gruyter, De Gruyter, vol. 1(2), pages 1-47, December.
  2. Arinaminpathy, Nimalan & Kapadia, Sujit & May, Robert, 2012. "Size and complexity in model financial systems," Bank of England working papers 465, Bank of England.
  3. Spiros Bougheas & Alan P. Kirman, 2014. "Complex Financial Networks and Systemic Risk: A Review," CESifo Working Paper Series 4756, CESifo Group Munich.
  4. Joseph E. Stiglitz, 2011. "Rethinking Macroeconomics: What Failed, And How To Repair It," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 9(4), pages 591-645, 08.
  5. Iori, G. & Porter, J., 2012. "Agent-Based Modelling for Financial Markets," Working Papers, Department of Economics, City University London 12/08, Department of Economics, City University London.
  6. Alan Kirman, 2010. "The Economic Crisis is a Crisis for Economic Theory ," CESifo Economic Studies, CESifo, CESifo, vol. 56(4), pages 498-535, December.

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