Financial crises and the evaporation of trust

Details Financial crises and the evaporation of trust Financial crises and the evaporation of trust

2009-11-16

arxiv.org/abs/0911.3099v1

Economy

Quantitative Finance

General Finance

21 pages, 4 figures

Scientific paper

Trust lies at the crux of most economic transactions, with credit markets being a notable example. Drawing on insights from the literature on coordination games and network growth, we develop a simple model to clarify how trust breaks down in financial systems. We show how the arrival of bad news about a financial agent can lead others to lose confidence in it and how this, in turn, can spread across the entire system. Our results emphasize the role of hysteresis -- it takes considerable effort to regain trust once it has been broken. Although simple, the model provides a plausible account of the credit freeze that followed the global financial crisis of 2007/8, both in terms of the sequence of events and the measures taken (and being proposed) by the authorities.

Affiliated with

Also associated with

No associations

Rating

Financial crises and the evaporation of trust does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Financial crises and the evaporation of trust, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Financial crises and the evaporation of trust will most certainly appreciate the feedback.

Rate now

Comments { 0 }

Profile ID: LFWR-SCP-O-499570