Strategic Investment in Protection in Networked Systems

We study the incentives that agents have to invest in costly protection against cascading failures in networked systems. Applications include vaccination, computer security and airport security. Agents are connected through a network and can fail either intrinsically or as a result of the failure of a subset of their neighbors. We characterize the equilibrium based on an agent's failure probability and derive conditions under which equilibrium strategies are monotone in degree (i.e. in how connected an agent is on the network). We show that different kinds of applications (e.g. vaccination, malware, airport/EU security) lead to very different equilibrium patterns of investments in protection, with important welfare and risk implications. Our equilibrium concept is flexible enough to allow for comparative statics in terms of network properties and we show that it is also robust to the introduction of global externalities (e.g. price feedback, congestion).Comment: 32 pages, 3 figure

Incentivizing Resilience in Financial Networks

When banks extend loans to each other, they generate a negative externality in the form of systemic risk. They create a network of interbank exposures by which they expose other banks to potential insolvency cascades. In this paper, we show how a regulator can use information about the financial network to devise a transaction-specific tax based on a network centrality measure that captures systemic importance. Since different transactions have different impact on creating systemic risk, they are taxed differently. We call this tax a Systemic Risk Tax (SRT). We use an equilibrium concept inspired by the matching markets literature to show analytically that this SRT induces a unique equilibrium matching of lenders and borrowers that is systemic-risk efficient, i.e. it minimizes systemic risk given a certain transaction volume. On the other hand, we show that without this SRT multiple equilibrium matchings exist, which are generally inefficient. This allows the regulator to effectively stimulate a `rewiring' of the equilibrium interbank network so as to make it more resilient to insolvency cascades, without sacrificing transaction volume. Moreover, we show that a standard financial transaction tax (e.g. a Tobin-like tax) has no impact on reshaping the equilibrium financial network because it taxes all transactions indiscriminately. A Tobin-like tax is indeed shown to have a limited effect on reducing systemic risk while it decreases transaction volume.Comment: 38 pages, 9 figure

Estimating solar radiation for plant simulation models

Five algorithms producing daily solar radiation surrogates using daily temperatures and rainfall were evaluated using measured solar radiation data for seven U.S. locations. The algorithms were compared both in terms of accuracy of daily solar radiation estimates and terms of response when used in a plant growth simulation model (CERES-wheat). Requirements for accuracy of solar radiation for plant growth simulation models are discussed. One algorithm is recommended as being best suited for use in these models when neither measured nor satellite estimated solar radiation values are available

Estimating the number of change-points in a two-dimensional segmentation model without penalization

In computational biology, numerous recent studies have been dedicated to the analysis of the chromatin structure within the cell by two-dimensional segmentation methods. Motivated by this application, we consider the problem of retrieving the diagonal blocks in a matrix of observations. The theoretical properties of the least-squares estimators of both the boundaries and the number of blocks proposed by L\'evy-Leduc et al. [2014] are investigated. More precisely, the contribution of the paper is to establish the consistency of these estimators. A surprising consequence of our results is that, contrary to the onedimensional case, a penalty is not needed for retrieving the true number of diagonal blocks. Finally, the results are illustrated on synthetic data.Comment: 30 pages, 8 figure

Supply Network Formation and Fragility

We model the production of complex goods in a large supply network. Each firm sources several essential inputs through relationships with other firms. Individual supply relationships are at risk of idiosyncratic failure, which threatens to disrupt production. To protect against this, firms multisource inputs and strategically invest to make relationships stronger, trading off the cost of investment against the benefits of increased robustness. We find that equilibrium aggregate production is robust to idiosyncratic disruptions. Nevertheless, there is a regime in which arbitrarily small systemic shocks cause arbitrarily steep drops in output, so that the the supply network is fragile. The endogenous configuration of supply networks provides a new channel for the powerful amplification of shocks