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Modeling Interdependent Risks

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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 suboptimal for everyone. We model this as the Nash equilibrium of a game and give conditions for such a suboptimal 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 suboptimal to the optimal equilibrium. We illustrate these results by reference to airline security and the control of infectious diseases via vaccination.

Suggested Citation

  • Geoffrey Heal & Howard Kunreuther, 2007. "Modeling Interdependent Risks," Risk Analysis, John Wiley & Sons, vol. 27(3), pages 621-634, June.
    • Handle: RePEc:wly:riskan:v:27:y:2007:i:3:p:621-634
    DOI: 10.1111/j.1539-6924.2007.00904.x
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    References listed on IDEAS

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    1. Geoffrey Heal & Howard Kunreuther, 2005. "IDS Models of Airline Security," Journal of Conflict Resolution, Peace Science Society (International), vol. 49(2), pages 201-217, April.
    2. Vicki M. Bier, 2007. "Choosing What to Protect," Risk Analysis, John Wiley & Sons, vol. 27(3), pages 607-620, June.
    3. Avinash Dixit, 2003. "Clubs with Entrapment," American Economic Review, American Economic Association, vol. 93(5), pages 1824-1829, December.
    4. Keohane, Nathaniel O & Zeckhauser, Richard J, 2003. "The Ecology of Terror Defense," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 201-229, March-May.
    5. Todd Sandler, 2003. "Collective Action and Transnational Terrorism," The World Economy, Wiley Blackwell, vol. 26(6), pages 779-802, June.
    6. 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.
    7. Lakdawalla, Darius & Zanjani, George, 2005. "Insurance, self-protection, and the economics of terrorism," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1891-1905, September.
    8. Geoffrey Heal & Howard Kunreuther, 2006. "Supermodularity and Tipping," NBER Working Papers 12281, National Bureau of Economic Research, Inc.
    9. Kunreuther, Howard & Heal, Geoffrey, 2003. "Interdependent Security," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 231-249, March-May.
    10. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-1277, November.
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    Cited by:

    1. Bandyopadhyay, Subhayu & Sandler, Todd, 2023. "Politically influenced counterterrorism policy and welfare efficiency," European Journal of Political Economy, Elsevier, vol. 76(C).
    2. Angelo Antoci & Alessandro Fiori Maccioni & Pier Luigi Sacco & Mauro Sodini, 2017. "Self-protection, Psychological Externalities, and the Social Dynamics of Fear," Journal of Conflict Resolution, Peace Science Society (International), vol. 61(2), pages 349-371, February.
    3. Yacov Y. Haimes & Kenneth Crowther & Barry M. Horowitz, 2008. "Homeland security preparedness: Balancing protection with resilience in emergent systems," Systems Engineering, John Wiley & Sons, vol. 11(4), pages 287-308, December.
    4. Gabriel Kuper & Fabio Massacci & Woohyun Shim & Julian Williams, 2020. "Who Should Pay for Interdependent Risk? Policy Implications for Security Interdependence Among Airports," Risk Analysis, John Wiley & Sons, vol. 40(5), pages 1001-1019, May.
    5. Hare, Forrest & Goldstein, Jonathan, 2010. "The interdependent security problem in the defense industrial base: An agent-based model on a social network," International Journal of Critical Infrastructure Protection, Elsevier, vol. 3(3), pages 128-139.
    6. Min Gong & Jonathan Baron & Howard Kunreuther, 2009. "Group cooperation under uncertainty," Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 251-270, December.
    7. J. S. Busby & B. Green & D. Hutchison, 2017. "Analysis of Affordance, Time, and Adaptation in the Assessment of Industrial Control System Cybersecurity Risk," Risk Analysis, John Wiley & Sons, vol. 37(7), pages 1298-1314, July.
    8. Andrew M. Smith & Andrés D. González & Leonardo Dueñas‐Osorio & Raissa M. D'Souza, 2020. "Interdependent Network Recovery Games," Risk Analysis, John Wiley & Sons, vol. 40(1), pages 134-152, January.
    9. Bandyopadhyay, Subhayu & Sandler, Todd, 2021. "Counterterrorism policy: Spillovers, regime solidity, and corner solutions," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 811-827.
    10. Travis Warziniack & Patricia Champ & James Meldrum & Hannah Brenkert-Smith & Christopher M. Barth & Lilia C. Falk, 2019. "Responding to Risky Neighbors: Testing for Spatial Spillover Effects for Defensible Space in a Fire-Prone WUI Community," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 1023-1047, August.
    11. Terrence August & Marius Florin Niculescu & Hyoduk Shin, 2014. "Cloud Implications on Software Network Structure and Security Risks," Information Systems Research, INFORMS, vol. 25(3), pages 489-510, September.
    12. Kay-Yut Chen & Jingguo Wang & Yan Lang, 2022. "Coping with Digital Extortion: An Experimental Study of Benefit Appeals and Normative Appeals," Management Science, INFORMS, vol. 68(7), pages 5269-5286, July.
    13. Crowther, Kenneth G., 2008. "Decentralized risk management for strategic preparedness of critical infrastructure through decomposition of the inoperability input–output model," International Journal of Critical Infrastructure Protection, Elsevier, vol. 1(C), pages 53-67.
    14. Yan, Xihong & Ren, Xiaorong & Nie, Xiaofeng, 2022. "A budget allocation model for domestic airport network protection," Socio-Economic Planning Sciences, Elsevier, vol. 82(PB).
    15. Corbet, Shaen & Gurdgiev, Constantin, 2019. "What the hack: Systematic risk contagion from cyber events," International Review of Financial Analysis, Elsevier, vol. 65(C).
    16. Wang, Zhen & Li, Chaofan & Jin, Xing & Ding, Hong & Cui, Guanghai & Yu, Lanping, 2021. "Evolutionary dynamics of the interdependent security games on complex network," Applied Mathematics and Computation, Elsevier, vol. 399(C).

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