Optimal Bailouts in Diversified Financial Networks
<|reference_start|>Optimal Bailouts in Diversified Financial Networks: 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.<|reference_end|>
@article{dasaratha2024optimal,
    title={Optimal Bailouts in Diversified Financial Networks},
    author={Krishna Dasaratha, Santosh Venkatesh, Rakesh Vohra},
    journal={arXiv preprint arXiv:2406.12818},
    year={2024},
    archivePrefix={arXiv},
    eprint={2406.12818},
    primaryClass={econ.TH cs.SI}
}