Working Paper: NBER ID: w8871
Authors: Howard Kunreuther; Geoffrey Heal
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.
Keywords: security; antiterrorism; externalities; investment incentives
JEL Codes: C7; H2; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Agent's belief that others will not invest in security (D80) | Agent's own incentive to invest in security (D82) |
| Agent's investment decision (G11) | Overall risk of terrorism (F59) |
| Non-investment by peers (G11) | Agent's incentive to invest in security (D82) |
| Airline's perception of other airlines not investing in security (L93) | Airline's decision to invest in baggage checking (L93) |