The Asymmetric Effect of Diffusion Processes: Risk Sharing and Contagion

We provide a general characterization of diffusion processes, allowing to analyze both risk-sharing and contagion at the same time. We show that interdependencies are beneficial when the economic environment is favorable, and detrimental when the economic environment deteriorates. The risk of contagion increases the volatility of outcome and thus reduces the ability of the network to provide risk-sharing._x000d_ _x000d_ Keywords: Risk-sharing, Contagion, Networks._x000d_ JEL Classification: D85._x000d_ _x000d_ Acknowledgments: We thank Ubaldo Garibaldi for helpful discussion and comments. Usual disclaims apply.