Will large economies be stable?

Statistical Physics and Complexity Group meeting

Will large economies be stable?

  • Event time: 3:00pm until 4:00pm
  • Event date: 3rd May 2022
  • Speaker: Professor Jean-Philippe Bouchaud (École Normale Supérieure and Capital Fund Management)
  • Location: Online - see email.

Event details

We study networks of firms in which inputs for production are not easily substitutable, as in several real-world supply chains. Building on Robert May's original argument for large ecosystems, 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.

Event resources