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Individual security, contagion, and network design

Diego Cerdeiro, Marcin Dziubiński and Sanjeev Goyal

Journal of Economic Theory, 2017, vol. 170, issue C, 182-226

Abstract: Individuals derive benefits from their connections, but these may expose them to external threats. Agents therefore invest in security to protect themselves. What are the network architectures that maximize collective welfare? We propose a model to explore the tension between connectivity and exposure to an external threat when security choices are decentralized. We find that both over-investment and under-investment in security are possible, and that optimal network architectures depend on the prevailing source of inefficiencies. Social welfare may be maximized in sparse connected networks when under-investment pressures are present, and fragmented networks when over-investment pressures prevail.

Keywords: Network design; Individual security; Inefficiencies; Networks (search for similar items in EconPapers)
JEL-codes: D85 D62 C72 (search for similar items in EconPapers)
Date: 2017
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