Liquidity, Financial Centrality, and the Value of Key Players

Consider an economy in which agents face endowment income risk but have stochastic market access as they interact in a stochastic financial network. We define the financial centrality of an agent as the ex-ante marginal social value of injecting an infinitesimal amount of liquidity to that agent. We show financially central agents are not only those who trade often, but those who have fewer trading links with other agents given this frequency, trade when income risk is high, when income shocks are positively correlated, when attitudes toward risk are more sensitive in the aggregate, and when there are tail risks. Equivalently, financial centrality is the value of a personalized security which pays off over states in which a named trader participates in market exchanges. Evidence from village risk-sharing network data in which the Pareto weights of the model are determined from bargaining solutions is consistent with theory. We allow for endogenous market participation and conclude with normative, policy implications. JEL Classification Codes: D14, E44, G01, L14, O16