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...

This paper introduces a model of endogenous network formation and systemic risk. In it, agents form networks that efficiently trade-off the possibility of systemic risk with the benefits of trade. Second, fundamentally ‘safer' economies generate higher interconnectedness, which in turn leads...

Diversified cross-shareholding networks are thought to be more resilient to shocks, but diversification also increases the channels by which a shock can spread. To resolve these competing intuitions we introduce a stochastic model of a diversified cross-shareholding network in which a firm’s...