2024/06/18 by Krishna Dasaratha, Dasaratha, Krishna, Santosh S. Venkatesh +3
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #FOS: Computer and information sciences #FOS: Economics and business #Social and Information Networks (cs.SI) #Theoretical Economics (econ.TH)
paper · pdf · doi:10.48550/arxiv.2406.12818
openalex publication_date 2024/06/18 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Widespread default involves substantial deadweight costs which could be countered by injecting capital into failing firms. Injections have positive spillovers that can trigger a repayment cascade. But which firms should a regulator bailout so as to minimize the total injection of capital while ensuring solvency of all firms? While the problem is, in general, NP-hard, for a wide range of networks that arise from a stochastic block model, we show that the optimal bailout can be implemented by a simple policy that targets firms based on their characteristics and position in the network. Specific examples of the setting include core-periphery networks.