Working Paper: NBER ID: w10706
Authors: Geoffrey Heal; Howard Kunreuther
Abstract: In an interdependent world the risks faced by any one agent depend not only on its choices but also on those of all others. Expectations about others' choices will influence investments in risk-management, and the outcome can be sub-optimal investment all round. We model this as the Nash equilibrium of a game and give conditions for such a sub-optimal equilibrium to be tipped to an optimal one. We also characterize the smallest coalition to tip an equilibrium, the minimum critical coalition, and show that this is also the cheapest critical coalition, so that there is no less expensive way to move the system from the sub- optimal to the optimal equilibrium. We illustrate these results by reference to airline security, the control of infectious diseases via vaccination and investment in research and development.
Keywords: No keywords provided
JEL Codes: C72; D80; H23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agents' decisions (D79) | risks faced by an agent (L85) |
| failure of a weak link (G33) | impacts on the entire system (F60) |
| investing in security (G24) | changes in the risk profile of others (D81) |
| forming a minimum critical coalition (D79) | tipping a suboptimal equilibrium to an optimal one (D50) |
| actions of less diligent airlines (L93) | suboptimal investment (G31) |