Financial Contagion: Theory and Experiments

This research project studies contagion among financial institutions and the role of financial market regulation in weakening or strengthening the transmission of financial turmoil across institutions.

The financial crisis of 2007/2008 is the most recent example of how the default of one financial institution may lead to the failure of other institutions, through a domino effect. The project develops a new model of contagion in which banks, connected in a network, hold claims on other banks. The decisions of each bank may impair the ability of other banks to repay their debt and may ultimately lead to a collapse of the entire banking system. This project is the first experimental study of contagion among financial institutions and seeks to contribute to the understanding of the nature of systemic risk.