Enhancing the Resilience of Networked Agents through Risk Sharing

Since social-economic systems increase interdependency, a crucial question arises: Is an interconnected world a safer or a more dangerous place in which to live? Over the last few years, we have witnessed the dark side of increasing interdependencies. As such, there is a growing need to focus on how to mitigate networked risk and to enhance the system resilience to the impact of a large-scale shock. The traditional engineering approach has been to design systems that are less vulnerable to damage from hazard events. On the other hand, system resilience is the ability to recover from failure and provide the continuity of system function. The goal of the present paper is to investigate the gain from risk sharing. We propose a mechanism of risk sharing that may enhance the resilience of the networked systems. The proposed risk sharing protocols are based on coordinated incentives of agents to survive collectively by absorbing external shocks. The key issue we would like to analyze is how the gain from risk sharing depends on the capacity of each agent to absorb shock and on the interconnections patterns among agents with risk sharing rules. We demonstrate that risk sharing is beneficial from a systems point of view when the agents’ capacities to shocks is high and detrimental when it is low. In particular, we evaluate the effectiveness of risk sharing in two domains. In the first domain, in which networked agents have the possibility of cascading failure, risk sharing is useful in mitigating systemic failure, especially if the agents are running at high load. In the second domain, we evaluate the ratio of safe agents who invest in risky portfolios or projects collectively. In this case, risk sharing is only beneficial if the agents’ risk absorbing capacity is high.