2009/11/16 by Kartik Anand, Anand, Kartik, Prasanna Gai +3
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Complex Systems and Time Series Analysis #Economic theories and models #FOS: Economics and business #FOS: Physical sciences #General Finance (q-fin.GN) #Physics and Society (physics.soc-ph)
paper · pdf · doi:10.48550/arxiv.0911.3099
openalex publication_date 2009/11/16 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Trust lies at the crux of most economic transactions, with credit markets being a notable example. Drawing on insights from the literature on coordination games and network growth, we develop a simple model to clarify how trust breaks down in financial systems. We show how the arrival of bad news about a financial agent can lead others to lose confidence in it and how this, in turn, can spread across the entire system. Our results emphasize the role of hysteresis -- it takes considerable effort to regain trust once it has been broken. Although simple, the model provides a plausible account of the credit freeze that followed the global financial crisis of 2007/8, both in terms of the sequence of events and the measures taken (and being proposed) by the authorities.