Financial linkages and portfolio choice

Subject

Economics

Publishing details

Social Sciences Research Network

Authors / Editors

Galeotti A; Ghiglino C; Goyal S

Biographies

Publication Year

2018

Abstract

Financial linkages smooth the shocks faced by individual components of the system, but they also create a wedge between ownership and decision-making. The classical intuition on the role of pooling risk in raising welfare is valid when ownership is evenly dispersed. However, when the ownership of some agents is concentrated in the hands of a few others, greater integration and diversification can lead to excessive risk taking and volatility and result in lower welfare. We also show that individuals undertake too little (too much) risk relative to the first best if the network is homogeneous (heterogeneous), and study optimal networks

Keywords

Financial risk; Networks; Moral hazard

Series

Social Sciences Research Network