Strategic investment in protection in networked systems

Leduc, M.V. & Momot, R. (2015). Strategic investment in protection in networked systems. In: Proceedings, "Web and Internet Economics", 11th International Conference, WINE 2015. pp. p. 434 Amsterdam, The Netherlands. ISBN 978-3-662-48994-9

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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, airport 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).

Item Type: Book Section
Uncontrolled Keywords: Network Economics, Network Games, Local vs Global Externalities, Cascading Failures, Systemic Risk, Immunization, Airport Security, Computer Security, Protection
Research Programs: Advanced Systems Analysis (ASA)
Depositing User: Luke Kirwan
Date Deposited: 10 Feb 2016 12:23
Last Modified: 27 Aug 2021 17:25

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