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Interdependent Security: The Case of Identical Agents

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  • Howard Kunreuther
  • Geoffrey Heal

Abstract

Do firms have adequate incentives to invest in anti-terrorism mechanisms? This paper develops a framework for addressing this issue when the security choices by one agent affect the risks faced by others. We utilize the airline security problem to illustrate how the incentive by one airline to invest in baggage checking is affected by the decisions made by others. Specifically if an airline believes that others will not invest in security systems it has much less economic incentive to do so on its own. Private sector mechanisms such as insurance and liability will not necessarily lead to an efficient outcome. To induce adoption of security measures one must turn to regulation, taxation or institutional coordinating mechanisms such as industry associations. We compare the airline security example with problems having a similar structure (i.e., computer security and fire protection) as well as those with different structures (i.e., theft protection and vaccinations). The paper concludes with suggestions for future research.

Suggested Citation

  • Howard Kunreuther & Geoffrey Heal, 2002. "Interdependent Security: The Case of Identical Agents," NBER Working Papers 8871, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:8871 Note: PE
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    References listed on IDEAS

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    1. Philipson, Tomas, 2000. "Economic epidemiology and infectious diseases," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 33, pages 1761-1799 Elsevier.
    2. Hershey, John C. & Asch, David A. & Thumasathit, Thi & Meszaros, Jacqueline & Waters, Victor V., 1994. "The Roles of Altruism, Free Riding, and Bandwagoning in Vaccination Decisions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 59(2), pages 177-187, August.
    3. Ian Ayres & Steven D. Levitt, 1998. "Measuring Positive Externalities from Unobservable Victim Precaution: An Empirical Analysis of Lojack," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 43-77.
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    Cited by:

    1. Cletus C. Coughlin & Jeffrey P. Cohen & Sarosh R. Khan, 2002. "Aviation security and terrorism: a review of the economic issues," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 9-24.
    2. Howard Kunreuther, 2001. "Risk Analysis and Risk Management in an Uncertain World," Center for Financial Institutions Working Papers 02-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. Brown, Jeffrey R. & Kroszner, Randall S. & Jenn, Brian H., 2002. "Federal Terrorism Risk Insurance," National Tax Journal, National Tax Association, vol. 55(3), pages 647-657, September.
    4. Jain, Sanjay & Mukand, Sharun W., 2004. "The economics of high-visibility terrorism," European Journal of Political Economy, Elsevier, vol. 20(2), pages 479-494, June.
    5. Repkine, Alexandre & Hwang, Junseog, 2004. "A Network-Economic Policy Study of Identity Management Systems and Implications for Security and Privacy Policy," MPRA Paper 7850, University Library of Munich, Germany.
    6. Geoffrey Heal & Howard Kunreuther, 2003. "You Only Die Once: Managing Discrete Interdependent Risks," NBER Working Papers 9885, National Bureau of Economic Research, Inc.
    7. 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;International Association for the Study of Insurance Economics (The Geneva Association), vol. 32(1), pages 91-111, June.
    8. Terrence August & Tunay I. Tunca, 2006. "Network Software Security and User Incentives," Management Science, INFORMS, vol. 52(11), pages 1703-1720, November.

    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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