The rise and fall of trust networks

Kartik Anand*, Prasanna Gai, Matteo Marsili

*Corresponding author for this work

    Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review

    5 Citations (Scopus)

    Abstract

    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.

    Original languageEnglish
    Title of host publicationProgress in Artificial Economics
    EditorsMarco LiCalzi, Lucia Milone, Paolo Pellizzari
    PublisherSpringer Heidelberg
    Pages77-88
    Number of pages12
    ISBN (Print)9783642139468
    DOIs
    Publication statusPublished - 2010
    EventArtificial Economics 2010 - Treviso, Italy, Treviso, Italy
    Duration: 9 Sept 201010 Sept 2010

    Publication series

    NameLecture Notes in Economics and Mathematical Systems
    Volume645
    ISSN (Print)0075-8442

    Conference

    ConferenceArtificial Economics 2010
    Country/TerritoryItaly
    CityTreviso
    Period9/09/1010/09/10

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