Interdependent Security: The Case of Identical Agents

30 Pages Posted: 4 Apr 2002 Last revised: 29 Sep 2022

See all articles by Howard Kunreuther

Howard Kunreuther

National Bureau of Economic Research (NBER); University of Pennsylvania - Wharton Risk Management and Decision Processes Center

Geoffrey M. Heal

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 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.

Suggested Citation

Kunreuther, Howard C. and Kunreuther, Howard C. and Heal, Geoffrey M., Interdependent Security: The Case of Identical Agents (April 2002). NBER Working Paper No. w8871, Available at SSRN: https://ssrn.com/abstract=306405

Howard C. Kunreuther (Contact Author)

National Bureau of Economic Research (NBER)

University of Pennsylvania - Wharton Risk Management and Decision Processes Center ( email )

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Geoffrey M. Heal

Columbia University - Columbia Business School, Finance ( email )

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

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