Impacts of Subsidized Security on Stability and Total Social Costs of Equilibrium Solutions in an N-Player Game with Errors

Abstract

Investment in defense by all agents is a socially optimum equilibrium in many interdependent security scenarios. However, practically, some agents might still choose not to invest in security due to bounded rationality and errors, thus decreasing the total social welfare. Previous work shows that providing subsidies may help induce more agents to invest. Our study suggests that giving subsidies to agents prone to making an erroneous choice could increase the stability of the socially optimum equilibrium, as well as decrease the total social costs.

ACKNOWLEDGMENT

This research was supported by the United States Department of Homeland Security through the National Center for Risk and Economic Analysis of Terrorism Events (CREATE) under grant number 2007-ST-061-000001. However, any opinions, findings, and conclusions or recommendations in this document are those of the authors and do not necessarily reflect views of the United States Department of Homeland Security. We also thank to Professor Vicki M. Bier (University of Wisconsin–Madison) for helpful comments.

Notes

¹ Our definition of the stability α is closely related to what game theorists call p-dominance (see Morris et al. 1995).

²Also sometimes called risk dominant (see Harsanyi and Selten 1988).