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Interdependent Security: A General Model

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  • Geoffrey Heal
  • Howard Kunreuther

Abstract

In an interdependent world the risks faced by any one agent depend not only on its choices but also on those of all others. Expectations about others' choices will influence investments in risk-management, and the outcome can be sub-optimal investment all round. We model this as the Nash equilibrium of a game and give conditions for such a sub-optimal equilibrium to be tipped to an optimal one. We also characterize the smallest coalition to tip an equilibrium, the minimum critical coalition, and show that this is also the cheapest critical coalition, so that there is no less expensive way to move the system from the sub- optimal to the optimal equilibrium. We illustrate these results by reference to airline security, the control of infectious diseases via vaccination and investment in research and development.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10706.

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Date of creation: Aug 2004
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Handle: RePEc:nbr:nberwo:10706

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  1. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  2. Dasgupta, Partha & Stiglitz, Joseph, 1981. "Resource Depletion under Technological Uncertainty," Econometrica, Econometric Society, vol. 49(1), pages 85-104, January.
  3. Partha Dasgupta & Joseph Stiglitz, 1980. "Uncertainty, Industrial Structure, and the Speed of R&D," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 1-28, Spring.
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Cited by:
  1. Bernhardt, Dan & Polborn, Mattias K., 2010. "Non-convexities and the gains from concealing defenses from committed terrorists," Economics Letters, Elsevier, vol. 107(1), pages 52-54, April.
  2. Shafran, Aric P., 2008. "Risk externalities and the problem of wildfire risk," Journal of Urban Economics, Elsevier, vol. 64(2), pages 488-495, September.
  3. Annette Hofmann, 2007. "Internalizing externalities of loss prevention through insurance monopoly: an analysis of interdependent risks," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 91-111, June.
  4. Vicki Bier & Santiago Oliveros & Larry Samuelson, 2006. "Choosing What to Protect: Strategic Defensive Allocation against an Unknown Attacker," Levine's Bibliography 321307000000000158, UCLA Department of Economics.

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