Strategic Investment in Protection in Networked Systems

32 Pages Posted: 29 Oct 2014 Last revised: 4 Aug 2016

Matt V. Leduc

International Institute for Applied Systems Analysis (IIASA)

Ruslan Momot

INSEAD - Technology and Operations Management

Date Written: August 1, 2016

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, Matt V. and Momot, Ruslan, Strategic Investment in Protection in Networked Systems (August 1, 2016). Available at SSRN: https://ssrn.com/abstract=2515968 or http://dx.doi.org/10.2139/ssrn.2515968

Matt V. Leduc (Contact Author)

International Institute for Applied Systems Analysis (IIASA) ( email )

Schlossplatz 1
A-2361
Laxenburg
Austria

Ruslan Momot

INSEAD - Technology and Operations Management ( email )

Boulevard de Constance
77 305 Fontainebleau Cedex
France

HOME PAGE: http://ruslanmomot.info

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