Default Ambiguity: Finding the Best Solution to the Clearing Problem

Papp, Pál András; Wattenhofer, Roger

doi:10.1007/978-3-030-94676-0_22

Cited by 5 publications

(1 citation statement)

References 17 publications

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“…Clearing is non-trivial in a network context because institutions typically depend on other institutions to satisfy their own obligations. Recent work in theoretical computer science has started to carve out interesting effects arising in this context [1,[11][12][13][14][16][17][18]. Despite these advances, incentives and economic implications in the clearing process are not well-understood.…”

Section: Introductionmentioning

confidence: 99%

Seniorities and Minimal Clearing in Financial Network Games

Hoefer¹,

Wilhelmi²

2022

Preprint

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Financial network games model payment incentives in the context of networked liabilities. In this paper, we advance the understanding of incentives in financial networks in two important directions: minimal clearing (arising, e.g., as a result of sequential execution of payments) and seniorities (i.e., priorities over debt contracts).We distinguish between priorities that are chosen endogenously or exogenously. For endogenous priorities and standard (maximal) clearing, the games exhibit a coalitional form of weak acyclicity. A strong equilibrium exists and can be reached after a polynomial number of deviations. Moreover, there is a strong equilibrium that is optimal for a wide variety of social welfare functions. In contrast, for minimal clearing there are games in which no optimal strategy profile exists, even for standard utilitarian social welfare. Perhaps surprisingly, a strong equilibrium still exists and, for a wide range of strategies, can be reached after a polynomial number of deviations. In contrast, for exogenous priorities, equilibria can be absent and equilibrium existence is NP-hard to decide, for both minimal and maximal clearing.

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