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Interdependent Security: The Case of Identical Agents

Listed author(s):
  • Howard Kunreuther
  • Geoffrey Heal

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8871.

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Date of creation: Apr 2002
Publication status: published as Kunreuther, Howard and Geoffrey Heal. "Interdependent Security: the case of identical agents." Journal of Risk and Uncertainty 2003.
Handle: RePEc:nbr:nberwo:8871
Note: PE
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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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