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Centralized clearing mechanisms: A programming approach

Author

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  • Peter Csoka

    (Corvinus University of Budapest)

  • P. Jean-Jacques Herings

    (Tilburg University)

Abstract

We consider financial networks where agents are linked to each other by financial contracts. A centralized clearing mechanism collects the initial endowments, the liabilities and the division rules of the agents and determines the payments to be made. A division rule specifies how the assets of the agents should be rationed. Since payments made depend on payments received, we are looking for solutions to a system of equations. The set of solutions is known to have a lattice structure, leading to the existence of a least and a greatest clearing payment matrix. Previous research has shown how decentralized clearing selects the least clearing payment matrix. We present a centralized approach towards clearing in order to select the greatest clearing payment matrix. To do so, we formulate the determination of the greatest clearing payment matrix as a programming problem. When agents use proportional division rules, this programming problem corresponds to a linear programming problem. We show that for other common division rules, it can be written as an integer linear programming problem.

Suggested Citation

  • Peter Csoka & P. Jean-Jacques Herings, 2022. "Centralized clearing mechanisms: A programming approach," The Journal of Mechanism and Institution Design, Society for the Promotion of Mechanism and Institution Design, University of York, vol. 7(1), pages 45-69, December.
    • Handle: RePEc:jmi:articl:jmi-v7i1a2
    DOI: 10.22574/jmid.2022.12.002
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    3. Ola Andersson & Lif Nelander, 2021. "Nudge the Lunch: A Field Experiment Testing Menu-Primacy Effects on Lunch Choices," Games, MDPI, vol. 12(1), pages 1-19, January.

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    More about this item

    Keywords

    Systemic risk; bankruptcy rules; integer linear programming.;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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