Financial Network Games
Panagiotis Kanellopoulos, Maria Kyropoulou, Hao Zhou

TL;DR
This paper models financial systems as networks where firms strategize over debt payments, analyzing equilibrium existence and efficiency under various realistic conditions using game theory.
Contribution
It introduces the concept of financial network games with priority-proportional payments and studies equilibrium existence and properties, a novel approach in this context.
Findings
Existence of equilibrium strategies depends on network and utility assumptions.
Unique payment profiles are not guaranteed even with fixed strategies.
The paper provides methods to compute valid payment profiles for fixed strategies.
Abstract
We study financial systems from a game-theoretic standpoint. A financial system is represented by a network, where nodes correspond to firms, and directed labeled edges correspond to debt contracts between them. The existence of cycles in the network indicates that a payment of a firm to one of its lenders might result to some incoming payment. So, if a firm cannot fully repay its debt, then the exact (partial) payments it makes to each of its creditors can affect the cash inflow back to itself. We naturally assume that the firms are interested in their financial well-being (utility) which is aligned with the amount of incoming payments they receive from the network. This defines a game among the firms, that can be seen as utility-maximizing agents who can strategize over their payments. We are the first to study financial network games that arise under a natural set of payment…
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Taxonomy
TopicsEconomic theories and models · Banking stability, regulation, efficiency · Digital Platforms and Economics
