How connected is too connected? Impact of network topology on systemic risk and collapse of complex economic systems

TL;DR

This paper investigates how the structure of economic networks influences systemic risk and collapse, revealing phase transitions and tipping points that inform policy for balancing complexity and robustness.

Contribution

It introduces a model analyzing the impact of network density and centralization on economic system stability and complexity, highlighting universal collapse patterns.

Findings

Collapse follows sigmoidal risk increase with connectivity.

Tipping points lead to phase transitions in systemic stability.

Network structure influences robustness and production potential.

Abstract

Economic interdependencies have become increasingly present in globalized production, financial and trade systems. While establishing interdependencies among economic agents is crucial for the production of complex products, they may also increase systemic risks due to failure propagation. It is crucial to identify how network connectivity impacts both the emergent production and risk of collapse of economic systems. In this paper we propose a model to study the effects of network structure on the behavior of economic systems by varying the density and centralization of connections among agents. The complexity of production increases with connectivity given the combinatorial explosion of parts and products. Emergent systemic risks arise when interconnections increase vulnerabilities. Our results suggest a universal description of economic collapse given in the emergence of tipping points and phase transitions in the relationship between network structure and risk of individual failure. This relationship seems to follow a sigmoidal form in the case of increasingly denser or centralized networks. The model sheds new light on the relevance of policies for the growth of economic complexity, and highlights the trade-off between increasing the potential production of the system and its robustness to collapse. We discuss the policy implications of intervening in the organization of interconnections and system features, and stress how different network structures and node characteristics suggest different directions in order to promote complex and robust economic systems.