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Journal of Risk and Uncertainty

, Volume 26, Issue 2–3, pp 231–249 | Cite as

Interdependent Security

  • Howard Kunreuther
  • Geoffrey Heal
Article

Abstract

Do firms have adequate incentives to invest in protection against a risk whose magnitude depends on the actions of others? This paper characterizes the Nash equilibria for this type of interaction between agents, which we call the interdependent security (IDS) problem. When agents are identical, there are two Nash equilibria for a wide range of cost and risk parameters—either everyone invests in protection or no one does. In some situations the incentive to invest in protection approaches zero as the number of unprotected agents increases. We develop an IDS model by first focusing on airline security and comparing the structure of this problem with other IDS examples such as computer security, fire protection, vaccinations, protection against bankruptcy, and theft protection. The paper also examines the roles of insurance, liability, fines and subsidies, third party inspections, regulations and coordinating mechanisms for internalizing the negative externalities characteristic of these problems. The concluding section suggests directions for future theoretical and empirical research.

externalities contagion protection terrorism Nash equilibrium 

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Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Howard Kunreuther
    • 1
  • Geoffrey Heal
    • 2
  1. 1.Wharton SchoolUniversity of PennsylvaniaPhiladelphiaUSA
  2. 2.Graduate School of BusinessColumbia UniversityNew YorkUSA

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