Strategic Investment in Protection in Networked Systems

Network Science 5.1, pp. 108-139, 2017, DOI: 10.1017/nws.2017.1

32 Pages Posted: 29 Oct 2014 Last revised: 6 Jun 2017

Date Written: January 15, 2017

Abstract

We study the incentives that agents have to invest in costly protection against cascading failures in networked systems. Applications include vaccination, computer security and airport security. Agents are connected through a network and can fail either intrinsically or as a result of the failure of a subset of their neighbors. We characterize the equilibrium based on an agent's failure probability and derive conditions under which equilibrium strategies are monotone in degree (i.e. in how connected an agent is on the network). We show that different kinds of applications (e.g. vaccination, malware, airport/EU security) lead to very different equilibrium patterns of investments in protection, with important welfare and risk implications. Our equilibrium concept is flexible enough to allow for comparative statics in terms of network properties and we show that it is also robust to the introduction of global externalities (e.g. price feedback, congestion).

Keywords: Network Economics, Network Games, Cascading Failures, Systemic Risk, Immunization, Airport Security, Computer Security, Protection

JEL Classification: D85, C72, L14, Z13

Suggested Citation

Leduc, Matthew V. and Momot, Ruslan, Strategic Investment in Protection in Networked Systems (January 15, 2017). Network Science 5.1, pp. 108-139, 2017, DOI: 10.1017/nws.2017.1, Available at SSRN: https://ssrn.com/abstract=2515968 or http://dx.doi.org/10.2139/ssrn.2515968

Matthew V. Leduc (Contact Author)

Paris School of Economics (PSE) / Université Paris 1 ( email )

48 boulevard Jourdan
Paris, 75014
France

HOME PAGE: http://sites.google.com/site/mattvleduc/

Ruslan Momot

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

HOME PAGE: http://www.ruslanmomot.info

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