Network Security and Contagion

Daron Acemoglu, Azarakhsh Malekian and Asuman Ozdaglar

No 19174, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a theoretical model of security investments in a network of interconnected agents. Network connections introduce the possibility of cascading failures due to an exogenous or endogenous attack depending on the profile of security investments by the agents. The general presumption in the literature, based on intuitive arguments or analysis of symmetric networks, is that because security investments create positive externalities on other agents, there will be underinvestment in security. We show that this reasoning is incomplete because of a first-order economic force: security investments are also strategic substitutes. In a general (non-symmetric) network, this implies that underinvestment by some agents will encourage overinvestment by others. We demonstrate by means of examples that there can be overinvestment by some agents and also that aggregate probabilities of infection can be lower in equilibrium compared to the social optimum. We then provide sufficient conditions for underinvestment. This requires both sufficiently convex cost functions (convexity alone is not enough) and networks that are either symmetric or locally tree-like. We also characterize the impact of network structure on equilibrium and optimal investments. Finally, we show that when the attack location is endogenized (by assuming that the attacker chooses a probability distribution over the location of the attack in order to maximize damage), there is an additional incentive for overinvestment: greater investment by an agent shifts the attack to other parts of the network.

JEL-codes: D6 D62 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-mic and nep-net
Note: IO
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

Published as Acemoglu, Daron & Malekian, Azarakhsh & Ozdaglar, Asu, 2016. "Network security and contagion," Journal of Economic Theory, Elsevier, vol. 166(C), pages 536-585.

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Related works:
Journal Article: Network security and contagion (2016)
Working Paper: Network Security and Contagion (2013)
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