Recent regulations in the U.S. and Europe incentivize the use of central counterparty clearing houses (CCP) to clear derivatives, arguably to create a less complex and more transparent interbank network that is less prone to financial instabilities. We construct a network model with endogenous...

This paper introduces a novel form of moral hazard specific to networks and illustrates this concept using simple models from coordination games, epidemics, supply chains, and financial networks. In these models, agents form beneficial links that also propagate costly contagion. Endogenously,...

This paper develops a model to study the formation and regulation of information transmission networks. We analyze a cat and mouse game between a regulator, who sets and enforces a regulatory environment, and agents, who form networks to disseminate and share insider information. For any given...

How do insiders respond to regulatory oversight? History suggests that they form sophisticated networks to share information and circumvent regulation. We develop a theory of the formation and regulation of information transmission networks. We show that agents with sufficiently complex networks...

This paper introduces a simple model of endogenous network formation and systemic risk. In the model, firms form joint ventures called ‘links' which are subsequently subjected to shocks that are either good or bad. Bad shocks incentivize default. Links yield full benefits only if the...