Network Power versus Social Responsibility: Examining Moral Hazard in the Global Network of Bilateral Swap Lines

• In Event: International Finance Challenges and Tools

Abstract

Moral hazard poses one of the most serious obstacles to international cooperation, especially when dealing with common challenges like financial crises. How is moral hazard incurred and identified in the present hyper-connected world? In contrast to the "weaponized interdependence" theory, we argue that cooperation networks can distribute uneven responsibilities. By employing an original dataset encompassing all bilateral swap agreements (BSAs) signed since 2008, which represents the most rapidly expanding layer of the global financial safety net, and utilizing both a Bayesian synthetic control method and panel matching, we find that states located on the periphery of the BSA network bear less overall cooperation responsibility, leading to moral hazard. Furthermore, in cooperative efforts aimed at preventing public bad, our research indicates that cooperation networks can distribute uneven responsibilities and constraints, while network power may fail to curb moral hazard. Central states taking on greater cooperation responsibilities also resolves the puzzle of why states can sign bilateral agreements without international organizations' monitoring and enforcement mechanisms.

Authors

• Qi Liu, Harvard University

• Xun Pang, Tsinghua University