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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.

Suggested Citation

  • Geoffrey Heal & Howard Kunreuther, 2003. "You Only Die Once: Managing Discrete Interdependent Risks," NBER Working Papers 9885, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9885
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    Citations

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    Cited by:

    1. Erwann Michel-Kerjan, 2003. "New Challenges in Critical Infrastructures : A US Perspective," Working Papers hal-00242947, HAL.
    2. 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.
    3. Christian Gollier, 2005. "Some Aspects of the Economics of Catastrophe Risk Insurance," CESifo Working Paper Series 1409, CESifo.
    4. Liying Mu & Milind Dawande & Xianjun Geng & Vijay Mookerjee, 2016. "Milking the Quality Test: Improving the Milk Supply Chain Under Competing Collection Intermediaries," Management Science, INFORMS, vol. 62(5), pages 1259-1277, May.
    5. Dulbecco, Philippe & Laporte, Bertrand, 2005. "How can the security of international trade be financed in developing countries? A global public good Approach," World Development, Elsevier, vol. 33(8), pages 1201-1214, August.
    6. Dunia López-Pintado & Duncan J. Watts, 2008. "Social Influence, Binary Decisions and Collective Dynamics," Rationality and Society, , vol. 20(4), pages 399-443, November.
    7. Hau Chan & Michael Ceyko & Luis Ortiz, 2017. "Interdependent Defense Games with Applications to Internet Security at the Level of Autonomous Systems," Games, MDPI, vol. 8(1), pages 1-60, February.
    8. 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.
    9. Ruperto P. Majuca, 2014. "Optimal solution to cybercrimes: lessons from law and economics," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 51(1), pages 84-116, June.

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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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