Network Efficiency, the Coase Question and the Banking System

Abstract

The paper applies the notions of network cost and efficiency, drawn from complex network theory, to fully characterize the classic “market versus firm” dichotomy of Coase 1937. Thanks to network analysis, the latter emerges as a wider issue which touches every system of interconnected agents who exchange among themselves physical goods or information. To exemplify their potential, the new tools are briefly applied to the analysis of the banking system by Allen & Gale 2000, where agents exchange liquidity and where troubles in a local area of the network may lead to systemic collapse.

Keywords: Coase question, network theory, efficiency, banking system, systemic risk

JEL Classification: D02, D23, G21