Working Paper: NBER ID: w9885
Authors: Geoffrey Heal; Howard Kunreuther
Abstract: This paper extends our earlier analysis of interdependent security issues to a general class of problems involving discrete interdependent risks with heterogeneous agents. There is a threat of an event that can only happen once, and the risk depends on actions taken by others. Any agent's incentive to invest in managing the risk depends on the actions of others. Security problems at airlines and in computer networks come into this category, as do problems of risk management in organizations facing the possibility of bankruptcy, and individuals' choices about whether to be vaccinated against an infectious disease. Surprisingly the framework also covers certain aspects of investment in R&D. Here we characterize Nash equilibria with heterogeneous agents and give conditions for tipping and cascading of equilibria.
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 |
|---|---|
| Anticipated actions of other agents (D84) | Agent's decision to invest in risk management (G11) |
| Agent's decision to invest in risk management (G11) | No agents invest in protection (G52) |
| Investment behavior of one agent (G11) | Cascading effects on subsequent agents (C69) |
| Cascading effects on subsequent agents (C69) | Shift in overall equilibrium (D59) |
| Change in one agent's behavior (C92) | Influence on others (C92) |