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Contagion Risk and Network Design

Diego Cerdeiro, Marcin Dziubinski and Sanjeev Goyal
Additional contact information
Marcin Dziubinski: Warsaw University

No 2015.56, Working Papers from Fondazione Eni Enrico Mattei

Abstract: Individuals derive benefits from their connections, but these may, at the same time, transmit external threats. Individuals therefore invest in security to protect themselves. However, the incentives to invest in security depend on their network exposures. We study the problem of designing a network that provides the right individual incentives. Motivated by cybersecurity, we first study the situation where the threat to the network comes from an intelligent adversary. We show that, by choosing the right topology, the designer can bound the welfare costs of decentralized protection. Both over-investment as well as under-investment can occur depending on the costs of security. At low costs, over-protection is important: this is addressed by disconnecting the network into two unequal components and sacrificing some nodes. At high costs, under-protection becomes salient: it is addressed by disconnecting the network into equal components. Motivated by epidemiology, we then turn to the study of random attacks. The over-protection problem is no longer present, whereas under-protection problems is mitigated in a diametrically opposite way: namely, by creating dense networks that expose the individuals to the risk of contagion.

Keywords: Cybersecurity; Epidemics; Security choice; Externalities (search for similar items in EconPapers)
JEL-codes: D82 D85 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-law and nep-net
Date: 2015-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed

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Working Paper: Contagion Risk and Network Design (2015) Downloads
Working Paper: Contagion Risk and Network Design (2015) Downloads
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