Individual security, contagion, and network design
Journal of Economic Theory
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Cerdeiro, D., Dziubiński, M., & Goyal, S. (2017). Individual security, contagion, and network design. Journal of Economic Theory, 170 182-226. https://doi.org/10.1016/j.jet.2017.05.006
Individuals derive benefits from their connections, but these may expose them to external threats. Agents therefore invest in security to protect themselves. What are the network architectures that maximize collective welfare? We propose a model to explore the tension between connectivity and exposure to an external threat when security choices are decentralized. We find that both over-investment and under-investment in security are possible, and that optimal network architectures depend on the prevailing source of inefficiencies. Social welfare may be maximized in sparse connected networks when under-investment pressures are present, and fragmented networks when over-investment pressures prevail.
network design, individual security, inefficiencies, networks
Sanjeev Goyal and Diego Cerdeiro were supported by European Research Area Complexity-Net (http://www.complexitynet.eu) through grant, Resilience and interaction of networks in ecology and economics (RESINEE). Diego Cerdeiro acknowledges financial support from Queens' College and the Cambridge Overseas Trust. Marcin Dziubiński was supported by the Strategic Resilience of Networks project realized within the Homing Plus programme of the Foundation for Polish Science, co-financed by the European Union from the Regional Development Fund within Operational Programme Innovative Economy (“Grants for Innovation”). Sanjeev Goyal acknowledges financial support from a Keynes Fellowship and the Cambridge-INET Institute.
External DOI: https://doi.org/10.1016/j.jet.2017.05.006
This record's URL: https://www.repository.cam.ac.uk/handle/1810/265233
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