Marginally stable economies?

TYPEStatistical & Bio Seminar
Speaker:Prof. Jean Philippe Bouchaud
Affiliation:École Polytechnique
Organizer:Yariv Kafri
Time:16:00 - 17:30
LocationZoom LINK

Will a large economy be stable? Building on Robert May’s original argument for large ecosystems, we investigate the possibility that evolutionary and behavioural forces conspire to drive the economy towards marginal stability. We study networks of firms in which inputs for production are not easily substitutable. We argue that such networks generically become dysfunctional when their size increases, when the heterogeneity between firms becomes too strong, when target profits are too high, or when substitutability of their production inputs is reduced. At marginal stability and for large heterogeneities, we find that the distribution of firm sizes develops a power-law tail, as observed empirically. Crises can be triggered by small idiosyncratic shocks, which lead to “avalanches” of defaults characterized by a power-law distribution of total output losses. This scenario would naturally explain the well-known “small shocks, large business cycles” puzzle, as anticipated long ago by Bak, Chen, Scheinkman, and Woodford.


Part of NSCS webinar series