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You Only Die Once: Managing Discrete Interdependent Risks

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  • Geoffrey Heal
  • Howard Kunreuther

Abstract

This paper extends our earlier analysis of interdependent security issues to a general class of problems involving discrete interdependent risks with heterogeneous agents. There is a threat of an event that can only happen once, and the risk depends on actions taken by others. Any agent's incentive to invest in managing the risk depends on the actions of others. Security problems at airlines and in computer networks come into this category, as do problems of risk management in organizations facing the possibility of bankruptcy, and individuals' choices about whether to be vaccinated against an infectious disease. Surprisingly the framework also covers certain aspects of investment in R&D. Here we characterize Nash equilibria with heterogeneous agents and give conditions for tipping and cascading of equilibria.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9885.

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Date of creation: Aug 2003
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Publication status: published as Richardson, H.W., P. Gordon and J.E. Moore II (eds.) The Economic Impacts of Terrorist Attacks. Cheltenham, UK: Edward Elgar, 2005.
Handle: RePEc:nbr:nberwo:9885

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  1. Darius Lakdawalla & George Zanjani, 2002. "Insurance, Self-Protection, and the Economics of Terrorism," NBER Working Papers 9215, National Bureau of Economic Research, Inc.
  2. Todd Sandler, 2003. "Collective Action and Transnational Terrorism," The World Economy, Wiley Blackwell, vol. 26(6), pages 779-802, 06.
  3. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
  4. Partha Dasgupta & Joseph Stiglitz, 1980. "Uncertainty, Industrial Structure, and the Speed of R&D," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 11(1), pages 1-28, Spring.
  5. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(2), pages 93-115, Spring.
  6. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(3), pages 151-170, Summer.
  8. Keohane, Nathaniel O & Zeckhauser, Richard J, 2003. " The Ecology of Terror Defense," Journal of Risk and Uncertainty, Springer, Springer, vol. 26(2-3), pages 201-29, March-May.
  9. Crawford, Vincent P & Haller, Hans, 1990. "Learning How to Cooperate: Optimal Play in Repeated Coordination Games," Econometrica, Econometric Society, Econometric Society, vol. 58(3), pages 571-95, May.
  10. Howard Kunreuther & Geoffrey Heal, 2002. "Interdependent Security: The Case of Identical Agents," NBER Working Papers 8871, National Bureau of Economic Research, Inc.
  11. Dasgupta, Partha & Stiglitz, Joseph, 1981. "Resource Depletion under Technological Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 49(1), pages 85-104, January.
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Cited by:
  1. Philippe Dulbecco & Bertrand Laporte, 2005. "How Can the Security of International Trade Be Financed in Developing Countries? A Global Public Good Approach," CAE Working Papers, Aix-Marseille Université, CERGAM 33, Aix-Marseille Université, CERGAM.
  2. Howard Kunreuther & Erwann Michel-Kerjan & Beverly Porter, 2003. "Assessing, Managing, and Financing Extreme Events: Dealing with Terrorism," NBER Working Papers 10179, National Bureau of Economic Research, Inc.
  3. Erwann Michel-Kerjan, 2003. "New Challenges in Critical Infrastructures : A US Perspective," Working Papers hal-00242947, HAL.
  4. Christian Gollier, 2005. "Some Aspects of the Economics of Catastrophe Risk Insurance," CESifo Working Paper Series 1409, CESifo Group Munich.

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