Interdependent Security: The Case of Identical Agents

Howard Kunreuther and Geoffrey Heal

No 8871, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: C7 H2 (search for similar items in EconPapers)
Date: 2002-04
New Economics Papers: this item is included in nep-pbe
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Kunreuther, Howard and Geoffrey Heal. "Interdependent Security: the case of identical agents." Journal of Risk and Uncertainty 2003.

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