Strategic Investment in Protection in Networked Systems

TL;DR

This paper analyzes how agents in networked systems decide to invest in costly protection against cascading failures, revealing diverse equilibrium patterns with significant welfare implications across different applications.

Contribution

It provides a comprehensive characterization of equilibrium investment strategies in network protection, accounting for network structure and externalities, with applications to various security contexts.

Findings

Equilibrium strategies vary significantly across different application types.

Network degree influences agents' protection investment decisions.

The model is robust to externalities like price feedback and congestion.

Abstract

We study the incentives that agents have to invest in costly protection against cascading failures in networked systems. Applications include vaccination, computer security and airport security. Agents are connected through a network and can fail either intrinsically or as a result of the failure of a subset of their neighbors. We characterize the equilibrium based on an agent's failure probability and derive conditions under which equilibrium strategies are monotone in degree (i.e. in how connected an agent is on the network). We show that different kinds of applications (e.g. vaccination, malware, airport/EU security) lead to very different equilibrium patterns of investments in protection, with important welfare and risk implications. Our equilibrium concept is flexible enough to allow for comparative statics in terms of network properties and we show that it is also robust to the introduction of global externalities (e.g. price feedback, congestion).