Subsidies in Interdependent Security With Heterogeneous Discount Rates

Abstract

Optimizing resource allocation in interdependent security problems is a serious challenge for homeland security. In this article, we present the equilibrium strategies for multiple interdependent defenders in a model where threats occur over time. We show that the existence of myopic agents can make it undesirable for non-myopic agents to invest in security when it would otherwise be in their interests to do so. The phenomena of tipping and cascading are discussed, and we explore how to target subsidies for security investment in order to achieve the best results from tipping. The above findings are illustrated in numerical examples, and their policy implications are discussed.