A System Dynamics Modelling of Contagion Effects in Accounts Risk Management

Financial contagion has been with us as long as there has been an economy. The system of collective human behavior usually creates stable markets, but occasionally, this collective behavior results in various bubbles. Financial contagion specifically deals with the domino effect of one banking institution failing, which, as a result of interrelationships with other banks, leads to further failures. The year 1929 was a very bad year, but 2008 had its moments as well. These financial contagions result in undermining confidence in similar institutions. Our research question is to examine whether the role of accounts receivable payments is affected by social interaction of those holding loans from a lending institution. System dynamics modelling is used to demonstrate the impact of word-of-mouth social contacts on accounts receivable, and the ensuing increase in financial risk. Copyright © 2014 John Wiley & Sons, Ltd.

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