Contagion in Fixed Debt Networks

This paper studies strategic savings and free-riding behaviours among ex- ante vulnerable firms in a fixed debt network under linear and quadratic default punishment structures. We specifically pay attention to networks without ex-ante default feedbacks. Results show Nash equilibrium are unique, strictly dominant. Firms welfare depends on a combination of the Vulnerability index of intensity of punishment for defaulting . A basic algorithm that computes the basic equilibrium decision of Firms is also proposed