IDS Models of Airline Security

Abstract

This article applies an earlier analysis of interdependent security issues to a general class of problems involving discrete interdependent exposure to terrorist risks. Any agent’s incentive to adopt risk-reducing measures depends on the actions of others because of the negative externalities created by not investing in protection. Using airline security as an illustrative example, the authors show that any individual airline will be less likely to invest in security measures as more firms in the industry also fail to invest. For a wide range of parameters, both individual airline and total industry profits can be significantly improved by everyone investing in security. The article discusses the role that private trade associations as well as public-sector actions such as taxes, subsidies, and regulations can play in dealing with the negative externalities caused by interdependent security. The article concludes with suggestions for future research.