Network Hazard and Bailouts

  title={Network Hazard and Bailouts},
  author={Selman Erol},
I introduce a model of contagion with endogenous network formation and strategic default, in which a government intervenes to stop contagion. The anticipation of government bailouts introduces a novel channel for moral hazard via its effect on network architecture. In the absence of bailouts, the network formed consists of small clusters that are sparsely… CONTINUE READING