Author
Moran, J
Bouchaud, J
Journal title
Physical Review E
DOI
10.1103/physreve.100.032307
Issue
3
Volume
100
Last updated
2023-10-25T05:09:56.613+01:00
Abstract
Will a large economy be stable? Building on Robert May's original argument for large ecosystems, we conjecture 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, as in several real-world supply chains. Relying on results from random matrix theory, we argue that such networks generically become dysfunctional when their size increases, when the heterogeneity between firms becomes too strong, 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.
Symplectic ID
1145382
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Publication type
Journal Article
Publication date
18 Sep 2019
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