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Strategic Interactions in Financial Networks

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  • Chukwudi Henry Dike

Abstract

This paper models interactions of firms in a pre-trading(fixed network of lending/borrowing) period whereby firms set fixed lending rates given loan management cost. We show strategic substitution in the rate each firm sets and more fundamentally, propose that the rates charged to debtors by a creditor firm is likened to results from a private provision of public good in networks game. We then highlight specific core-periphery network properties in relation to interdependence and Nash rate charged by firms. For welfare policies, we find neutrality of intervention policies that create or reduce transaction cost and improvement based on policies that provide administrative subsidies thus creating an avenue for cost effective resource transfer policy. Lastly, we find significant relationship between a firms centrality measured by weaker negative externality and welfare improvement due to such subsidy.

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  • Chukwudi Henry Dike, 2020. "Strategic Interactions in Financial Networks," 2020 Papers pdi579, Job Market Papers.
  • Handle: RePEc:jmp:jm2020:pdi579
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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