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Contagion Risk and Network Design

Author

Listed:
  • Diego Cerdeiro

    (The International Monetary Fund)

  • Marcin Dziubinski

    (Warsaw University)

  • Sanjeev Goyal

    (University of Cambridge)

Abstract

Individuals derive benefits from their connections, but these may, at the same time, transmit external threats. Individuals therefore invest in security to protect themselves. However, the incentives to invest in security depend on their network exposures. We study the problem of designing a network that provides the right individual incentives. Motivated by cybersecurity, we first study the situation where the threat to the network comes from an intelligent adversary. We show that, by choosing the right topology, the designer can bound the welfare costs of decentralized protection. Both over-investment as well as under-investment can occur depending on the costs of security. At low costs, over-protection is important: this is addressed by disconnecting the network into two unequal components and sacrificing some nodes. At high costs, under-protection becomes salient: it is addressed by disconnecting the network into equal components. Motivated by epidemiology, we then turn to the study of random attacks. The over-protection problem is no longer present, whereas under-protection problems is mitigated in a diametrically opposite way: namely, by creating dense networks that expose the individuals to the risk of contagion.

Suggested Citation

  • Diego Cerdeiro & Marcin Dziubinski & Sanjeev Goyal, 2015. "Contagion Risk and Network Design," Working Papers 2015.56, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2015.56
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    References listed on IDEAS

    as
    1. Acemoglu, Daron & Malekian, Azarakhsh & Ozdaglar, Asu, 2016. "Network security and contagion," Journal of Economic Theory, Elsevier, vol. 166(C), pages 536-585.
    2. Antonio Cabrales & Piero Gottardi & Fernando Vega-Redondo, 2017. "Risk Sharing and Contagion in Networks," Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 3086-3127.
    3. Sanjeev Goyal & Adrien Vigier, 2014. "Attack, Defence, and Contagion in Networks," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1518-1542.
    4. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    5. Heski Bar-Isaac & Mariagiovanna Baccara, 2006. "How to Organize Crime," Working Papers 06-07, New York University, Leonard N. Stern School of Business, Department of Economics.
    6. repec:oup:restud:v:81:y:2014:i:4:p:1518-1542. is not listed on IDEAS
    7. Matthew Elliott & Benjamin Golub & Matthew O. Jackson, 2014. "Financial Networks and Contagion," American Economic Review, American Economic Association, vol. 104(10), pages 3115-3153, October.
    8. Kunreuther, Howard & Heal, Geoffrey, 2003. "Interdependent Security," Journal of Risk and Uncertainty, Springer, vol. 26(2-3), pages 231-249, March-May.
    9. Mariagiovanna Baccara & Heski Bar-Isaac, 2008. "How to Organize Crime -super-1," Review of Economic Studies, Oxford University Press, vol. 75(4), pages 1039-1067.
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    Cited by:

    1. Bravard, Christophe & Charroin, Liza & Touati, Corinne, 2017. "Optimal design and defense of networks under link attacks," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 62-79.
    2. Landwehr, Jakob, 2015. "Network design and imperfect defense," Center for Mathematical Economics Working Papers 537, Center for Mathematical Economics, Bielefeld University.
    3. Marcin Dziubinski & Sanjeev Goyal & Adrien Vigier, 2015. "Conflict and Networks," Cambridge Working Papers in Economics 1565, Faculty of Economics, University of Cambridge.
    4. Marco Pelliccia, 2015. "Decentralised Defence of a (Directed) Network Structure," Birkbeck Working Papers in Economics and Finance 1506, Birkbeck, Department of Economics, Mathematics & Statistics.
    5. repec:eee:jeborg:v:157:y:2019:i:c:p:708-734 is not listed on IDEAS

    More about this item

    Keywords

    Cybersecurity; Epidemics; Security choice; Externalities;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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