When risks are interdependent, loss-prevention activities of one agent influence the risks faced by others. The social return to an investment in loss-prevention is greater than the private return. From a perspective of social welfare, the market allocation is not optimal and leads to...

When risks are interdependent, an agent’s decision to self-protect affects the loss probabilities faced by others. Due to these externalities, economic agents invest too little in prevention relative to the socially efficient level by ignoring marginal external costs or benefits conferred on...