Subsidized Security and Stability of Equilibrium Solutions in an N -Player Game with Errors∗

Optimizing resource allocation in interdependent security problems is a serious challenge for U.S. homeland security. In this paper, game theory is applied to this challenge in the case where investment by one defender has positive externalities for other players. The phenomena of tipping and cascading are discussed, and we explore how to target subsidized security in order to achieve the best results from tipping. We show that subsidization of security investments can increase the stability of equilibrium solutions, and also decrease the total expected social costs. The above findings are illustrated in numerical examples.