TY - GEN
T1 - The rise and fall of trust networks
AU - Anand, Kartik
AU - Gai, Prasanna
AU - Marsili, Matteo
PY - 2010
Y1 - 2010
N2 - The working of economies relies on trust, with credit markets being a notable example. The evaporation of trust may precipitate the economy from a good to a bad state, with long-lasting and large scale structural changes, witness the 2007/8 global financial crisis. 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 model exhibits hysteresis behavior, suggesting that it takes considerable effort to regain trust once it has been broken, emphasizing the self-reinforcing nature of trust at the systemic level. Although simple, the model provides a plausible account of the credit freeze that followed the global financial crisis of 2007/8.
AB - The working of economies relies on trust, with credit markets being a notable example. The evaporation of trust may precipitate the economy from a good to a bad state, with long-lasting and large scale structural changes, witness the 2007/8 global financial crisis. 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 model exhibits hysteresis behavior, suggesting that it takes considerable effort to regain trust once it has been broken, emphasizing the self-reinforcing nature of trust at the systemic level. Although simple, the model provides a plausible account of the credit freeze that followed the global financial crisis of 2007/8.
UR - http://www.scopus.com/inward/record.url?scp=79960092699&partnerID=8YFLogxK
U2 - 10.1007/978-3-642-13947-5_7
DO - 10.1007/978-3-642-13947-5_7
M3 - Conference contribution
AN - SCOPUS:79960092699
SN - 9783642139468
T3 - Lecture Notes in Economics and Mathematical Systems
SP - 77
EP - 88
BT - Progress in Artificial Economics
A2 - LiCalzi, Marco
A2 - Milone, Lucia
A2 - Pellizzari, Paolo
PB - Springer Heidelberg
T2 - Artificial Economics 2010
Y2 - 9 September 2010 through 10 September 2010
ER -