Contagion Risk and Network Design

65 Pages Posted: 16 Jun 2015

See all articles by Diego Cerdeiro

Diego Cerdeiro

International Monetary Fund (IMF)

Marcin Dziubiński

University of Warsaw - Institute of Informatics

Sanjeev Goyal

University of Cambridge

Date Written: April 10, 2015

Abstract

Individuals derive benefits from their connections, but these may, at the same time, transmit external threats. Individuals therefore invest in security to protect themselves. However, the incentives to invest in security depend on their network exposures. We study the problem of designing a network that provides the right individual incentives. Motivated by cybersecurity, we first study the situation where the threat to the network comes from an intelligent adversary. We show that, by choosing the right topology, the designer can bound the welfare costs of decentralized protection. Both over-investment as well as under-investment can occur depending on the costs of security. At low costs, over-protection is important: this is addressed by disconnecting the network into two unequal components and sacrificing some nodes. At high costs, under-protection becomes salient: it is addressed by disconnecting the network into equal components. Motivated by epidemiology, we then turn to the study of random attacks. The over-protection problem is no longer present, whereas under-protection problems is mitigated in a diametrically opposite way: namely, by creating dense networks that expose the individuals to the risk of contagion.

Keywords: Cybersecurity, Epidemics, Security choice, Externalities

JEL Classification: D82, D85

Suggested Citation

Cerdeiro, Diego and Dziubiński, Marcin and Goyal, Sanjeev, Contagion Risk and Network Design (April 10, 2015). FEEM Working Paper No. 056.2015, Available at SSRN: https://ssrn.com/abstract=2619022 or http://dx.doi.org/10.2139/ssrn.2619022

Diego Cerdeiro

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Marcin Dziubiński (Contact Author)

University of Warsaw - Institute of Informatics ( email )

Banacha 2
Warsaw, 02-097
Poland

Sanjeev Goyal

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

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