March 7, 2024

11am NY time / 5pm Paris time

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Rakesh Vohra

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will present:​

Optimal Bailouts in Diversified Financial Networks

with Krishna Dasaratha and Santosh S. Venkatesh

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Abstract:

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Widespread default involves substantial deadweight costs. To counter them, a regulator can inject capital into failing firms. These injections have positive spillovers that can trigger a repayment cascade. But which firms should the 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 networks that arise from a stochastic block model, we show that the optimal bailout can be implemented by a simple index policy in which a firm index depends only on its characteristics and its position in the network. Specific examples of the setting include core-periphery networks.