How Connected is Too Connected? Impact of Network Topology on Systemic Risk and Collapse of Complex Economic Systems
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10614_2020_10021_ReferencePDF.pdf
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6.62 MB
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Adobe PDF
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ec3512d47086c85c646d0bf76362d0a0
Author(s)
Vié, Aymeric
Morales, Alfredo J.
Date Issued
July 24, 2020
Publisher
Springer US
Version
Author's final manuscript
Abstract
Abstract
Economic interdependencies have become increasingly present in globalized production, financial and trade systems. While establishing interdependencies among economic agents is crucial for the production of complex products, they may also increase systemic risk due to failure propagation. It is crucial to identify how network connectivity impacts both the emergent production and risk of collapse of economic systems. In this paper we propose a model to study the effects of network structure on the behavior of economic systems by varying the density and centralization of connections among agents. The complexity of production increases with connectivity given the combinatorial explosion of parts and products. Emergent systemic risks arise when interconnections increase vulnerabilities. Our results suggest a universal description of economic collapse given in the emergence of tipping points and phase transitions in the relationship between network structure and risk of individual failure. This relationship seems to follow a sigmoidal form in the case of increasingly denser or centralized networks. The model sheds new light on the relevance of policies for the growth of economic complexity, and highlights the trade-off between increasing the potential production of the system and its robustness to collapse. We discuss the policy implications of intervening in the organization of interconnections and system features, and stress how different network structures and node characteristics suggest different directions in order to promote complex and robust economic systems.
MIT Department
Massachusetts Institute of Technology. Media Laboratory
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Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use.
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DOI of Published Version
https://doi.org/10.1007/s10614-020-10021-5
