Interdependent Security: The Case of Identical Agents

Columbia Business School Working Paper

21 Pages Posted: 6 Mar 2002

See all articles by Geoffrey M. Heal

Geoffrey M. Heal

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Howard Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2002

Abstract

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.

Keywords: externalities, contagion, terrorism, Nash equilibrium

JEL Classification: C70, D80, H20

Suggested Citation

Heal, Geoffrey M. and Kunreuther, Howard C., Interdependent Security: The Case of Identical Agents (February 2002). Columbia Business School Working Paper. Available at SSRN: https://ssrn.com/abstract=302405 or http://dx.doi.org/10.2139/ssrn.302405

Geoffrey M. Heal (Contact Author)

Columbia Business School - Finance and Economics ( email )

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HOME PAGE: http://www.gsb.columbia.edu/faculty/gheal/

National Bureau of Economic Research (NBER)

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Howard C. Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department ( email )

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212-854-0423 (Phone)
215-573-2130 (Fax)

National Bureau of Economic Research (NBER)

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