Strategic investment in protection in networked systems

Leduc, M.V. & Momot, R. (2017). Strategic investment in protection in networked systems. Network Science 5 (1) 108-139. 10.2139/ssrn.2515968.

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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 di_erent kinds of applications (e.g. vaccination, airport security) lead to very di_erent equilibrium patterns of investments in protection, with important welfare and risk implications. Our equilibrium concept is exible 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: Article
Uncontrolled Keywords: Network Economics, Network Games, Local vs Global Externalities, Cascading Failures, Systemic Risk, Immunization, Airport Security, Computer Security
Research Programs: Advanced Systems Analysis (ASA)
Depositing User: Luke Kirwan
Date Deposited: 07 Dec 2016 08:49
Last Modified: 27 Aug 2021 17:28

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