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“Gaming the System”: Decision Making by Interdependent

Critical Infrastructure
Allison C. Reilly, Andrew Samuel, Seth D. Guikema
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Allison C. Reilly, Andrew Samuel, Seth D. Guikema (2015) “Gaming the System”: Decision Making by Interdependent Critical
Infrastructure. Decision Analysis
Published online in Articles in Advance 01 Oct 2015
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Interdependent Critical Infrastructure

Allison C. Reilly
Department of Geography and Environmental Engineering, Whiting School of Engineering, Johns Hopkins University,
Baltimore, Maryland 21218, acr@jhu.edu
Andrew Samuel
Department of Economics, Sellinger School of Business, Loyola University Maryland, Baltimore, Maryland 21210,
asamuel@loyola.edu
Seth D. Guikema
Department of Geography and Environmental Engineering, Whiting School of Engineering, Johns Hopkins University,
Baltimore, Maryland 21218, sguikema@jhu.edu
S upporting strong, resilient, and integrated critical infrastructure is vital to upholding the U.S. economy and
its national security. Arguably, no sector of the economy could exist without the reliable and predictable
networks on which it depends. To date, the research on interdependent infrastructure has concentrated on
describing the sources of the dependencies and developing models for predicting performance and cascading
disruptions after a hazardous event. However, these models fail to capture the perspective of the operators
of these networks and how competing, independent objectives lead to suboptimal investment decisions and
hence suboptimal network performance. Rather than focus on how interdependent infrastructures operate and
possibly fail, we take the perspective of their operators and ask why they make the decisions that they do.
The goal of this paper is to demonstrate how strategic interdependencies may impact performance of coupled
systems by shifting investments away from what is collectively best toward decisions that are more myopic
and optimal from the perspective of a single infrastructure. Through our model, we make inferences on the
level of investments networks make, relate this to performance, and provide policy recommendations on how
to promote reliable infrastructure.
Keywords: interdependent infrastructure; game theory; strategic interdependency
History: Received on December 1, 2014. Accepted by Editor-in-Chief Rakesh K. Sarin on April 21, 2015,
after 2 revisions. Published online in Articles in Advance.
1. Introduction explanation for government-operated infrastructure,

The American Society of Civil Engineering predicts it does not explain shortfalls in private infras-
U.S. chronic underinvestment in its infrastructure tructure investment, especially since over 85% of
will exceed $3.6 trillion by 2020 (American Society U.S. infrastructure is privately owned (U.S. Govern-
of Civil Engineers 2013). It warns that the impact ment Accountability Office 2006). Others suggest that
of this underinvestment can slow economic growth market-based rates set by regulators, including the
and threaten national security. In addition to these Federal Regulatory Commission, are insufficient for
macrolevel consequences, underinvestment can also infrastructure upgrades (Fershee 2007). They further
have tragic, local consequences such as the I-35 bridge claim that the underlying uncertainty of the true
collapse in Minneapolis in 2007. lifespan of infrastructure delays upgrades, especially
The infrastructure research has offered several rea- since hassling local residents with disruptions is dis-
sons for this underinvestment. Many point to declin- tasteful when the need does not appear immediate
ing the U.S. vehicle miles traveled and improving (Haberman 2014). Although many explanations have
fuel efficiency generating less revenue from the fuel been offered, it is clear that all the causes of underin-
tax (Weatherford 2011). Although this is a plausible vestment have not been identified.
1
Reilly, Samuel, and Guikema: Decision Making by Interdependent Critical Infrastructure
2 Decision Analysis, Articles in Advance, pp. 1–18, © 2015 INFORMS
This paper presents a novel reason for underin- from what is collectively optimal for the entire net-
vestment within an interdependent infrastructure by work. Under different interdependent specifications,
focusing on the behavior of the owners and opera- which we describe later in this paper, we examine the
tors of individual systems within the network. We investment decisions of each of these players and then
model each system as a node within an interdepen- translate this to performance. We show that the play-
dent network and, consistent with the previous liter- ers, without sufficient oversight and regulation, may
ature, refer to this as an interdependent infrastructure create infrastructure ecosystems that are more vulner-
(Johansson and Hassel 2010). Within this framework, able and less efficient because individual operators act
we show that a decision maker of an infrastructure strategically. We also study the implications of models
network may invest at a suboptimal level because of interdependent systems that do not recognize the
of the strategic decisions of the other operators of strategic behavior of their operators.1
the individual systems within this network. Specif- Identifying these issues is important, particularly
ically, these decision makers often make resource given that 85% of infrastructure is privately owned
and investment choices anticipating how the decision and furthermore because there is a desire to privatize
makers of other interdependent systems will respond much of the remaining infrastructure (Hanke 2008,
to their own choices. This, in turn, leads to a dif- Rowey 2013). However, to our knowledge, none of the
ference between the investment level that maximizes infrastructure literature has acknowledged the pos-
the joint performance of the overall network—and sibility that privatization can have undesirable out-
the investment levels that are chosen by a private, comes because of these strategic interactions. Thus,
profit-maximizing owner of each system within the our paper serves as a complement to the existing lit-
network. erature on underinvestment in infrastructure.
To illustrate this intuition with a stylized case, con- In light of this, the contribution of our paper is
sider two geographically interdependent systems: a threefold. To begin, this is the first paper of which we
water distribution system and a communication util- are aware to examine investment strategies by deci-
ity, both of which are independently considering rou- sion makers of interdependent infrastructure systems.
tine underground maintenance in a right-of-way (i.e., We later relate these investment strategies to perfor-
a major thoroughfare). In these instances, it may ben- mance outcomes for some conditions. Moreover, to
efit the water utility to wait to conduct maintenance our knowledge this is the first interdependent infras-
on its own system until after the communication util- tructure paper to not take the vantage point of inter-
ity has begun excavating the road for its own mainte- dependent infrastructure classification or postdisrup-
nance. Thus, because the water utility anticipates the tion system operability in favor of decision making.
communication utility’s resource decision, it may hold Second, from a policy perspective, this paper provides
off on conducting maintenance, thereby increasing the insights into why infrastructure systems can find it
likelihood of the pipes breaking in the meantime and advantageous to underinvest relative to a social plan-
impacting both the water and communication utili- ner case and shows why privatization may worsen
ties. Further, because the communication utility does this condition. Third, from a methodological perspec-
not fully internalize the impact of its decision on the tive, we evaluate investment decisions by strategic
water utility, its resource choices (such as when and decision makers that possess asymmetry in how they
how it excavates) may not be optimal from the per- influence each other’s performance. This is different
spective of the combined reliability of both utilities.
To study these issues, we develop a game-theoretic 1
Our paper is closely related to Fudenberg and Tirole (1984),
model of interdependent infrastructure systems who investigate investment into research and development in a
where we view the strategic operators as rational duopolistic market. However, the focus of their paper is market
interdependencies, whereas we study the implications for infras-
players in a game. The model is primarily used to
tructure investment and reliability within the context of nonmarket
understand how the operators of individual systems interdependencies (such as physical or geographical dependencies;
within a network will “game” the system by distort- see Rinaldi et al. 2001). Furthermore, they do not consider the social
ing investment decisions in their own favor and away welfare problem, which we consider.
Decision Analysis, Articles in Advance, pp. 1–18, © 2015 INFORMS 3
from the traditional perspective (e.g., Varian 2004) indicator for the relationship among systems. How-
that explicitly assumes symmetric influences. ever, these records are simply snapshots of system
The rest of this paper is organized as follows. functionality and do not reveal the strategic invest-
In §2, we discuss the related literature. In §3, we ment decisions made by operators or how these deci-
present our game-theoretic model for two coupled sions and investments translate into performance.
infrastructure systems with strategic decision mak- Empirical mathematical models build on the afore-
ers and summarize the results for simultaneous- and mentioned qualitative databases and measure inter-
sequential-move games and for a social planner. Sec- dependencies. For example, Mendonça and Wallace
tion 4 discusses implications of strategic resource (2006) measure the correlation of system failures after
selection and its impact on system performance, regu- the September 11th terrorist attacks. Dueñas-Osorio
lation, and governance. In §5, we present a case study, and Kwasinski (2012) extend this work by measur-
and in §6, we provide concluding remarks, policy rec- ing the correlation among empirical restoration curves
ommendations, and opportunities for future research. of different sectors after the Mw 8.8 Maule, Chile
earthquake as an indicator of system-level interdepen-
2. Related Literature dence. Again, this work largely provides indicators of
With few exceptions, most literature on interdepen- the relationship among systems that are considered
dent infrastructure either (1) unpacks the interde- an input to our model.
pendencies among different sectors or (2) measures Models grounded in economic theory (e.g., Haimes
or predicts system performance either under normal and Jiang 2001, Haimes et al. 2005, Zhang and Peeta
conditions or after some calamity. To achieve this, 2011) largely assess the influence of the loss in func-
three primary modeling methods have been used— tionality in one system on dependent systems and
empirical models, economic models, and physical have been applied to different spatial scales (Anderson
(or engineering) models. Ouyang (2014) provides a et al. 2007, Crowther and Haimes 2010) without rely-
review of the research to date.
ing on a specific disruption for data. That is, these
The goal of most empirical models for interdepen-
models are built using macroeconomic data and do not
dent infrastructure systems (e.g., Bigger et al. 2009,
isolate the impacts that one specific historic disruption
Luiijf et al. 2009) is to provide a method of re-
has on an industry. These models are extensions of
cording interdependencies that have been revealed
the Leontief input–output model, which traditionally
among systems. This then produces a better vul-
measures the interdependence among economic sec-
nerability analysis of actual systems. Using mostly
tors assuming linear, continuous relationships among
media reports (e.g., newspapers) and interviews with
sectors. Haimes and Jiang (2001) consider physi-
operators, this literature has documented primar-
ily systems-level failures and ultimately develops cal inoperability and measure how system distur-
qualitative databases that record these observations. bances impact one another in terms of production
Ideally, observed failures reveal patterns and com- and degraded capacity. Haimes et al. (2005) extend
mon failure characteristics, which then aid other oper- this theory to consider demand inoperability, which
ators in assessing their vulnerabilities (Ouyang 2014). indicates reduced sector production resulting from
McDaniels et al. (2007) and Chang et al. (2009), for changes in demand, and is benefited by the rich pre-
example, focus primarily on the impacts of power existing economic input–output data sets produced
outages on those systems that rely on it and empiri- by the Bureau of Economic Analysis. These data sets
cally assess the patterns and societal consequences of include 16 years of make and use data sets for 389
these disruptions. As described in §3, dependencies interacting industries in the United States (Bureau of
are net beneficial or net harmful after a perturbation Economic Analysis 2013). Haimes et al. choose 12 rep-
(e.g., an investment, a hazardous event)—beneficial resentative sectors in their case study. These meth-
when a dependent system benefits from a perturba- ods indicate system vulnerability without requiring
tion in the system on which it depends and harm- postdisruption empirical discovery. All inoperability
ful otherwise—and these historical records provide an input–output models assume that interdependence is
described by the inoperability parameter. This param- selects resources in the “narrow” interests of his or her
eter is essentially the Leontief technical coefficient, own system. That is, investment decisions are made
which indicates “the ratio of the input of industry i to to maximize only the operator’s own system perfor-
industry j, with respect to the total production require- mance; the effects of his or her investment decisions
ments of industry j” (Haimes et al. 2005, p. 68), except on the performance of the other (interdependent) sys-
that now the technical coefficient reflects inoperabil- tems and, thereby the overall network, are not con-
ity. Our model assumes that interdependence is intrin- sidered. We consider investment decisions when these
sically described by performance functions and first- operators make decisions both simultaneously and
and second-order influences of resources on perfor- sequentially. Simultaneous investment decisions hap-
mance, which can be positive or negative. This relaxes pen when operators make decisions at the same time
the linearity and continuity requirements present in or at different time frames but are unaware of deci-
inoperability input–output models. sions made by other operators, perhaps because of lax
Finally, we should note that other predictive mod- reporting rules. For example, consider a wastewater
els of interdependent system performance tend to treatment facility in Pennsylvania in the mid-2000s,
be engineering models and include network mod- unaware of the fracking boom about to commence
els (Dueñas-Osorio et al. 2007, Dueñas-Osorio and and the new demand for wastewater treatment. Its
Vemuru 2009), simulation models (Ouyang et al. 2009, investment decisions do not consider how fracking
Johansson and Hassel 2010), and optimization models fluids could enter its facility. Simultaneously, drilling
(Nozick et al. 2005). These models aid in translating companies are studying and leasing advantageous
how resource selection impacts reliability and perfor- drilling locations while not fully resolving how they
mance. As such, they are considered complementary will treat the dirty water. Network operators may
to the model presented here in the sense that they pro- alternatively choose to invest sequentially. For exam-
vide the specific forms of the performance functions ple, consider a telecommunications network consid-
described in our model. ering upgrading fiber-optic cables beneath a major
Our model lies between (1) unpacking the interde- thoroughfare. It may wait until the local water utility
pendencies among different sectors and (2) predicting begins construction, knowing that repairs on water
system performance either under normal conditions mains are inevitable, in efforts of eschewing road
or after some calamity. To understand strategic inter- demolition costs.
dependencies and how operators induce behaviors in We then compare these results of this “equilibrium”
interdependent systems, there needs to be an underinvestment decision to the optimal investment lev-
standing of the conditions under which operators are els chosen by a social planner who maximizes the
making the decisions—this includes an understand- performance of a coupled network. For ease of pre-
ing of the existing physical, geographic, logical, and sentation, we provide a description of the model in
cyber interdependencies. Hence, we view the outputs §3.1 and then formally analyze the model in §§3.2–3.4.
of these models (i.e., the unpacked interdependencies All proofs are in the appendix.
among different sectors) to be the inputs to the model 3.1. Model Definitions and Assumptions
presented in this paper. Also, the model presented Consider a simple case of two interdependent infras-
here derives investment decisions that serve as input tructure systems, a main system (system M) and a
for predictive models on system performance. Hence, secondary system (system S) that are each owned or
we view the outputs of this model to be inputs to managed by distinct organizations.2 Systems M and S
models of system performance.
2
It should be noted that we use “main” and “secondary” (sys-
3. A Model of Two Strategic tems M and S, respectively) purely from the perspective for expos-
itory purposes, but the designation of which system is main and
Interdependent Systems which one is secondary is purely arbitrary. Hence, in what follows,
In this section we present a model to understand the we will conduct all analysis only of system M, keeping in mind that
investment strategies of the operators of two inter- the analysis can be understood from the perspective of whichever
dependent systems. We assume that each operator system is identified as “main.”
have resources rM > 0 and rS > 0, respectively, which the maximization can be determined by taking the
they individually control and that impact the sys- first-order conditions.3
tems’ performance, M and S ; rM and rS can also be The (equilibrium) strategic choice of each player
thought of as investments. The marginal costs of the will depend on the properties of each system’s per-
resources are given by cM and cS > 0. The performance formance function, especially with regard to how it
of system M is characterized by the function relates to the other’s resource choices. Thus, we find it
useful to identify the following properties and intro-
M 4rM 1 rS 51 (1) duce the following definitions, with respect to their
where M 4 · 5 is increasing and strictly concave in both performance functions.
rM ∈ 601 +7 and rS ∈ 601 +7. Similarly, the perfor- Definition 1. The impact of one system’s invest-
mance of system S is characterized by the function ment on the other system can be positive or nega-
tive depending on the context. That is, ¡M 4 · 5/¡r S
S 4rS 1 rM 51 (2)
and ¡S 4 · 5/¡r M may be positive or negative. When
where S 4 · 5 is increasing and strictly concave in both ¡k 4 · 5/¡r j > 0 for j 6= k, we say that system k is bene-
rM ∈ 601 +7 and rS ∈ 601 +7. fited by system j’s investment. When ¡k 4 · 5/¡r j < 0, we
The functions M and S are the expected payoffs say that system k is harmed by system j’s investment.
from the performance of each system. Thus, for exam-
It is important to highlight the possibility that one
ple, M may be p4f 4rM 1 rS 55v1 where p4f 4rM 1 rS 55 is
system may benefit the other while the other may
the probability that system M will not fail, which is
harm the former. For example, an urban flood protec-
a function of the system performance given rM and
tion system is designed to mitigate the risk of flood-
rS , and v the benefit from its successful performance.
ing in a region. A system “downstream” of the flood
More generally, it can reflect operational performance
protection system is offered protection and hence ben-
(e.g., serviceability or throughput), consumer bene-
efits from expenditures in a flood protection system.
fit or utility (e.g., travel time reduction or cost), or
On the other hand, an “upstream” system may be
resource effectiveness (e.g., benefit–cost ratio), among
harmed from the expenditures because of water dis-
other functions.
placement resulting from an increased risk of flood-
We make the following assumptions with respect
to the performance functions of each system. First, ing. If the dependence is physical in nature, and
we assume that each system’s performance is increas- an investment makes an output more reliable, any
ing, strictly concave, and twice continuously differen- system that relies on this output as its input then
tiable in its own level of resources (rk for k = 8M1 S9). also benefits. For example, if an electric-power util-
Monotonicity means that ¡M 4 · 5/¡r M and ¡S 4 · 5/¡r S ity undergrounds its lines to improve reliability, all
are positive. This presupposes that a system invests infrastructure sectors that rely on constant electricity,
to increase performance and more investment leads such as hospitals and water pumping stations, ben-
to improved performance. The concavity assumption, efit. In reality, since it is possible for a system to be
i.e., that ¡ 2 M 4 · 5/¡r 2M and ¡ 2 S 4 · 5/¡r 2s are negative, benefited or harmed by another system’s resources,
implies diminishing marginal returns to each system’s we believe it is useful to distinguish between the two
resources, which is standard in the literature. Sec- cases. Further, as we show in §§3.2–3.4, the strategic
ond, we assume that limrS →0 ¡M 401 rS 5/¡r M > cM and choices of each system, as well as the optimal level of
limrM →0 ¡S 401 rM 5/¡r S > cS . This assumption ensures resources, will depend on this property.
that even when the other system’s resources are very Our second definition highlights the marginal
low, the marginal benefit of investing in its own impact of one system’s resources on the other and fol-
resources is greater than the marginal cost. Accord- lows the definition in Vives (2005).
ingly, the best response of each system will be strictly
positive when the other’s resource choice is 0. Finally, 3
Throughout we shall assume that sufficient conditions exist for an
the (twice) continuous differentiability ensures that interior solution in resource choices.
Definition 2. If focuses on purely economic interdependencies (e.g.,

Vives 2005).
¡ 2 S 4 · 5 ¡ 2 M 4 · 5
>0 and > 01 Definition 2 is critical for the strategic interaction
¡rS ¡rM ¡rM ¡rS
between the two systems. When ¡ 2 S 4·5/¡r S ¡r M >01
then the main (secondary) system is a strategic com- then an increase in investment made by system M1 rM ,
plement to the secondary (main) system. Conversely, will raise the marginal productivity of rS . Since the
if ¡ 2 S 4 · 5/¡rS ¡rM < 0 (¡ 2 M 4 · 5/¡rM ¡rS < 0), then the marginal productivity of rS is higher, ceteris paribus
main (secondary) system is a strategic substitute to the an increase in rM will encourage investment by the
secondary (main) system. secondary system. The opposite will be true when
¡ 2 S 4 · 5/¡r S ¡r M < 0.4
In the first case, because the main (secondary)
system’s resource investment improves the marginal 3.2. Simultaneous-Move Game
productivity of secondary (main) system’s resource First, we consider a simultaneous-move game where
investment, we say that the main (secondary) system systems M and S simultaneously choose rM and rS ,
encourages investment by the secondary (main) system. respectively. This strategic form is equivalent to both
In the second case, we say that the main (secondary) systems making their investment decisions sequen-
system discourages investment by the secondary (main) tially but where the system that moves second in the
system. sequence does not observe the first system’s invest-
The phrases “to encourage investment” and “to dis- ment choice. Neither system M nor system S is bound
courage investment” are best explained by examples. by a budget constraint. Without a budget constraint,
Consider a water utility acquiring additional electric we find the efficient level of investment that is justi-
pumps to distribute water to more customers and fied by the marginal benefits of its investment.
an electric-power distribution system that is under- System M chooses rM to maximize
grounding wires to make electricity more reliable. The
M 4rM 1 rS 5 − rM cM 1
undergrounding of wires benefits the water utility
because electricity is now more reliable while simulta- and system S chooses rS to maximize
neously making the utility’s new electric pumps more
productive. With fewer power outages, the pumps S 4rS 1 rM 5 − rS cS 0
can be used more often. By contrast, consider a water System M’s best response function, rˆM1 Sim 4rS 5, is
utility acquiring electric generators for supplemental derived from its first-order condition:
power during outages. As before, an electric-power
d M 4 · 5
utility is investing in system reliability. The under- rˆM1 Sim 4rS 52 = cM 0 (3)
dr M
grounding of wires makes the water utility’s purchase
of generators less resource productive on the margin Similarly, system S’s best response function, denoted
because they will be needed less often. As such, we by rˆS1 Sim 4 · 5, is derived from its first-order condition:
say that the water utility is discouraged from buying d S 4 · 5
additional generators. rˆS1 Sim 4rM 52 = cS 0 (4)
dr S
Here, we make an important note that one system
∗ ∗
can encourage the other while the other system dis- The solution to Equations (3) and (4) (rM1 Sim , rS1 Sim )
courages the former. Hence, first- and second-order constitutes the Nash equilibrium of the simultaneous-
influence asymmetries can occur, and as we show move game, which is shown in the appendix.
in §§3.3, 3.4, and 4, the results from symmetric and
4
asymmetric cases differ. This existence of asymme- As an example, the function j 4rj 1 rk 5 = rj + jk rk + jk djk rj rk for
j1 k ∈ 8M1 S9, j 6= k, and jk 1 djk ∈ 6−11 17 satisfies all our assump-
tries, however, is underappreciated and overlooked in
tions. By choosing appropriate positive or negative values of jk ,
the literature, which nearly universally assumes sym- system j may be benefited or harmed by system k. Similarly, by
metric influences (e.g., Varian 2004). Furthermore, of choosing a positive or negative value for djk , system j may encour-
the work that considers symmetric influences, most age or discourage investment by system k.
A straightforward application of the implicit func- Equation (6) presents the standard maximization con-
tion theorem shows that rˆS1 Sim 4rM 5 is increasing in rM dition that system M will choose a level of resources
if and only if where the marginal cost of its own resources equals
¡ 2 S 4 · 5 the marginal benefit. Observe from Equation (6) that
> 00
¡r S ¡r M the marginal benefit of the main system’s resources,

Similar analysis also shows that rˆM1 Sim 4rS 5 is increas- d M 4 · 5/dr M , consists of two parts: the direct marginal
ing in rS if and only if improvement to system M from its own investment
(¡ M 4 · 5/¡r M ) and the indirect marginal impact as a
¡ 2 M 4 · 5 result of the strategic interactions of these two sys-
> 00
¡r M ¡r S tems (4¡ M 4 · 5/¡r S 54d rˆS /dr M 55. As we have noted in
Recall that when the above expression is positive, we Definition 1, the marginal impact of rS on M , cap-
say that system 4S5 encourages investment by sys- tured in the expression ¡ M 4 · 5/¡r S , may be posi-
tem S 4M5. Furthermore, note that given our model, it tive or negative. Additionally, the way in which rM
is possible for one of these terms to be positive while impacts rˆS , captured in the expression d rˆS /dr M , may
the other is negative. be positive or negative depending on whether sys-
tem M encourages or discourages investment by sys-
3.3. Sequential-Move Game tem S. Thus, the marginal benefit of rM depends on
Next, we consider the sequential-move game. Sys- whether system S benefits or harms system M and on
tem M makes an investment in its system and, the strategic interaction of rS on M (Definition 2).
observing this, system S in turn makes a strategic To analyze the above issues formally, we first study
investment in its own system’s resources. The timing how each system’s impact on the other system—that
of the game is as follows: is, whether they are beneficial or harmful, encourag-
Stage 1. In time period 1, system M chooses rM1 Seq ing or discouraging—affects the equilibrium choice of
to maximize its performance, knowing system S will rM for sequential-move games. The results are charac-
respond in a strategic manner. terized below in Proposition 1.
Stage 2. After observing rM1 Seq , system S chooses
rS1 Seq to maximize its performance in time period 2. Proposition 1. Consider the sequential-move game.
Its response impacts system M’s performance when a If system M’s resource investment encourages resource
dependency exists. investment by system S, then system M invests more when
Using backward induction, and under the assump- system S’s investment benefits system M’s performance
tion of sequential rationality, we solve for the than when it harms its performance. When system M’s
(subgame-perfect) Nash equilibrium of the sequential- resource investment discourages investment by system S,
move game. In time period 2, system S chooses its then system M invests less when system S’s investment
level of resources after observing system M’s resource benefits system M’s performance than when it harms its
choice. Thus, system S will choose a level of resources performance.
according to Equation (3) above, taking rM as given. The above result interestingly shows that when sys-
At time period 1, system M internalizes system S’s tem M discourages investment by system S, then sys-
response in its decision making and chooses rM1 Seq to tem M chooses a higher level of resources when it
maximize is harmed by system S than when it is benefited by
system S to offset the negative impact of system S’s
M 4rM 1 rˆS1 Seq 4rM 55 − cM rM 0 (5)
resource choices on its own performance. When sys-
Assuming that the second-order condition holds, the tem M encourages investment by system S, then the
solution to (5) must satisfy opposite effect prevails, and system M chooses a
higher level of investment when it is benefited by sys-
d M 4 · 5 ¡ M 4 · 5 ¡ M 4 · 5 d rˆS tem S than when it is harmed by it.
rˆM1 Seq 4rS 52 ≡ +
dr M ¡r M ¡r S dr M Consider, as before, a power utility and a water
= cM 0 (6) utility. The power utility moves first and invests in
reliability improvements—specifically, underground- encourages resource investment by system S). That

ing lines. The water utility can invest in more pumps, is, if ¡ 2 S 4 · 5/¡r S ¡r M > 0, then rS1 Seq > rS1 Sim whenever
which harms the power utility, or invest in replac- rM1 Seq > rM1 Sim , etc. When ¡ 2 S 4 · 5/¡r S ¡r M < 0 (i.e.,
ing aging pipes, which benefits the water utility. The when system M discourages resource investment by
reason is that additional pumps increase the pressure system S), the resource allocation will be the reverse
in pipes, which can cause additional pipes to break of those identified for the main system.
and flood the power utility’s assets. Replacing aging
pipes, on the other hand, prevents pipe breaks. The 3.4. The Social Optimum
power utility encourages both of the water utility’s To benchmark the investment strategies, we investi-
choices. With more reliable power, the water system is gate the decisions of a hypothetical social planner.
online more frequently, meaning new pumps or new We assume that the social planner does not face any
pipes would be used more often. Assume for now regulatory (administrative) costs and has full infor-
that the power utility knows which choice—pumps mation regarding the performance functions of the
or pipes—that the water utility will select. Since the resources choices of the individual systems in the net-
power utility encourages the water utility to invest, work. Finally, we also assume that the social planner
and this leads to more investment by the water utility, does not have vested political reasons for wanting to
the benefit or harm caused by the water utility con- raise the performance of some systems in the network
veyed to the power utility is magnified. If the water at the expense of other systems.
utility invests in pumps, the power utility will invest Under these assumptions, the social planner seeks
less than if the water utility invests in repairing aging to optimally allocate investments simultaneously in
both systems to maximize overall performance. We
pipes so as to minimize the harm done and to maxi-
assume that the social planner does not have any
mize the benefits conveyed.
innate preference for one system over another and
Next we turn to a comparison of the sequential-
chooses to maximize the sum of the expected ben-
versus simultaneous-move game, which we character-
efits from each system net of his or her costs. The
ize in the following proposition.
social planner, therefore, chooses rk for k ∈ 8M1 S9 to
Proposition 2. The equilibrium level of resources cho- maximize
sen by system M in the sequential-move game may be
greater or less than the level of resources chosen by it S 4rS 1 rM 5 + M 4rM 1 rS 5 − rM cM − rS cS 0 (7)
in the simultaneous-move game, depending on whether
system M is benefited or harmed by system S’s resource Assuming the second-order conditions are satis-
investment and whether it encourages or discourages sys-
fied5 and that an interior solution exists, the above
tem S’s resource investment. We show this graphically in
the table below.
5
We assume that objective function to the social planner’s prob-
lem is quasiconcave, i.e., that the Hessian to the social planner’s
System M System M
problem is negative semidefinite. Thus, the first-order conditions
encourages discourages
identify the solution to the planner’s maximization problem.
S’s resource S’s resource
In the following example, we show that the social planner’s objec-
investment investment
tive function (7) is quasiconcave over the range of rM and rS . Let
System M benefited by ∗
rM1 ∗ ∗ ∗ √
Seq > rM1 Sim rM1 Seq < rM1 Sim M 4rS 1 rM 5 = B r M + M rS + M dM rM rS 1
S’s resource investment √
∗ ∗ ∗ ∗
S 4rS 1 rM 5 = A r S + S rM + S dS rS rM 1
System M harmed by rM1 Seq < rM1 Sim rM1 Seq > rM1 Sim
S’s resource investment for M 1 S ∈ 6−11 17, and A and B are large constants. Also, let
G4rM rS 5 be the social planner’s objective function as defined by (7).
With regard to the secondary system, the re- It is straightforward to see that ¡ 2 G/¡rM2 = −B/44rM3/2 5, ¡ 2 G/¡rS2 =
−A/44rS3/2 5, and ¡ 2 G/¡rM ¡rS = M dM + S dS . For the Hessian of
source allocation of the simultaneous-move versus
G4rM rS 5 to be semidefinite, GrM 1 rM GrS 1 rS > G2rS 1 rS must be true. Since
sequential-move game will be identical to those iden- AB/416rM3/2 rS3/2 5 > M dM + S dS is true, as long as A and B are suf-
tified in the above proposition for the main system ficiently large, then the Hessian of G4rM rS 5 is semidefinite and the
whenever ¡ 2 S 4 · 5/4¡r S ¡r M 5 > 0 (i.e., when system M social planner’s objective function is quasiconcave.
maximization problem satisfies system, whereas in the sequential-move game, the

operator is more concerned with the marginal impact
∗ ¡ M 4 · 5 ¡ S 4 · 5
rM1 Soc 2 + = cM (8) of the other system’s resources on one’s self and the
¡r M ¡r M marginal productivity of the other system resources
and on its performance.

∗ ¡ M 4 · 5 ¡ S 4 · 5
rS1Soc 2 + = cS 0 (9) Proposition 4. Assume that a solution to the social
¡r S ¡r S planner’s problem exists. In equilibrium, the two systems
∗
System M’s optimal level of investment, rM1 Soc , is a will over- or underinvest in resources in the sequential-
function of the marginal impact of system M’s invest- move game relative to the social planner depending on
ment on itself and system S. Our first result compares whether their investments benefit or harm each other and
whether they encourage or discourage each other. We show
the equilibrium resources of the simultaneous-move
this graphically below.
game with those chosen by the social planner.
Proposition 3. Assume that a solution to the social Systems M and S System M
planner’s problem exists. In equilibrium, the two systems both benefit benefits S;
will over- or underinvest in resources in the simultaneous- each other S harms M
move game relative to the social planner depending on
∗ ∗ ∗ ∗
whether their resource investments benefit or harm each Both systems M and S rM1 Soc Ò rM1 Seq rM1 Soc Ò rM1 Seq
other and encourage or discourage each other. We show this encourage each other ∗ ∗
rS1 Soc Ò rS1 Seq ∗ ∗
rS1 Soc Ò rS1 Seq
graphically below. System M encourages S, ∗
rM1 ∗ ∗ ∗
Soc Ò rM1 Seq rM1 Soc > rM1 Seq
∗ ∗ ∗ ∗
S discourages M rS1 Soc Ò rS1 Seq rS1 Soc Ò rS1 Seq
Systems M and S System M ∗ ∗ ∗ ∗
System M discourages S, rM1 Soc > rM1 Seq rM1 Soc Ò rM1 Seq
both benefit benefits S; ∗ ∗ ∗ ∗
each other S harms M S encourages M rS1 Soc Ò rS1 Seq rS1 Soc Ò rS1 Seq
∗ ∗ ∗ ∗
∗ ∗ ∗ ∗
Both systems M and S rM1 Soc Ò rM1 Seq rM1 Soc Ò rM1 Seq
Both systems M and S rM1 Soc > rM1 Sim rM1 Soc Ò rM1 Sim ∗ ∗ ∗ ∗
∗ ∗ ∗ ∗
discourage each other rS1 Soc Ò rS1 Seq rS1 Soc Ò rS1 Seq
encourage each other rS1 Soc > r S1 Sim rS1 Soc Ò rS1 Sim
∗ ∗ ∗ ∗
System M encourages S, rM1 Soc Ò rM1 Sim rM1 Soc > rM1 Sim As with Proposition 3, if system M and system S’s invest-
∗ ∗ ∗ ∗
S discourages M rS1 Soc > rS1 Sim rS1 Soc Ò rS1 Sim ments both harm each other, the direction of each of the
System M discourages S, ∗
rM1 ∗
Soc > rM1 Sim
∗
rM1 ∗
Soc Ò rM1 Sim above inequalities is the opposite of the case in which their
∗ ∗ ∗ ∗
S encourages M rS1 Soc Ò rS1 Sim rS1 Soc < rS1 Sim investments both benefit each other. If system M harms sys-
Both systems M and S ∗
rM1 ∗
Soc Ò rM1 Sim
∗
rM1 ∗
Soc > rM1 Sim
tem S, when system S benefits system M, then the direction
discourage each other ∗ ∗
rS1 Soc Ò rS1 Sim
∗ ∗
rS1 Soc < rS1 Sim of each the inequalities is the opposite of the case in which
system M benefits system S when the latter harms the for-
Furthermore, if system M and system S’s resource invest- mer. When the results are ambiguous, they are ambiguous
ments both harm each other, the direction of each of the in both cases.
above inequalities is the opposite of the case in which their
investments both benefit each other. If system M harms sys-
4. Performance Implications
tem S, when the latter benefits the former, then the direction
Although resource choices are relevant, a more use-
of each of the inequalities is the opposite of the case in which
ful evaluative measure is how the performance of the
system M benefits system S when the latter harms the for-
individual systems excluding costs, M and S , and
mer. When the results are ambiguous, they are ambiguous
that of the combined network in equilibrium com-
in both cases.
pare with that of the social planner. Indeed, this could
Our next result compares the sequential-move suggest that in some circumstances, regulating these
game with the social planner choices. It should resource decisions through an external agency (such
be noted that this comparison is intrinsically more as a local government or a state’s utility commission)
involved because there are more second characteris- may be more valuable than in others. In the follow-
tics to consider. The social planner is concerned with ing result, we identify how the resource distortions
the marginal impact of one’s resources on the other (either over- or underinvestment relative to the social
planner) defined in Propositions 3 and 4 translate into Result 1. System M can distort system S’s resource
performance distortions (either over- or underperfor- choice to its own advantage without needing to lower
mance relative to the social planner). its own resource level if and only if the following con-
Equations (3) and (6) enable us to identify condition is satisfied:
ditions under which system M’s performance will

¡ M 4 · 5 ¡ 2 S 4 · 5
be higher in the sequential-move game than in the > 00 (10)
¡r S ¡r S ¡r M
simultaneous-move game. The critical difference of
these equations is Moreover, if this expression is satisfied, the main
system’s performance will always be higher in the
¡ M 4 · 5 ¡ 2 S 4 · 5
0 sequential-move game than in the simultaneous-
¡r S ¡r S ¡r M move game. If the expression is violated, the sys-
If this expression is positive (i.e., when system S ben- tem M’s performance may be higher or lower in the
efits system M and system M encourages system S, sequential-move game relative to the simultaneous-
or when system S harms system M and system M move game.
discourages system S5, then system M distorts sys-
Because of this phenomenon, in the case where sys-
tem S’s resource choice to its advantage at no cost
tems M and S are mutually beneficial and system M
because doing so does not require it to lower its own
∗ ∗
encourages investment by system S, the sequential-
resource level rM (i.e., rM1 Seq > rM1 Sim from Proposi- move game unambiguously leads to a higher perfor-
tion 2). The effect is that system M’s performance is
mance than the simultaneous-move game. Intuitively,
higher in the sequential-move game. Take the case
since both systems are mutually beneficial to each
where system S benefits system M and system M
other’s performance (and encourage each other’s
encourages system S. When system M expends more
resource investments), system M distorts its resource
resources—as we know it does in the sequential-move
investment upward and “overinvests” to encourage
case—it improves its own performance. Seeing that
system S to increase its resource investment. This,
system M encourages system S to invest, system S
in turn, raises the performance of both systems in the
expends more on resources. Because of system S ben-
sequential-move game relative to the simultaneous-
efits system M, the latter’s performance improves.
move game. This is because the performance of sys-
In aggregate, system M’s performance in increased
tem M is monotonically increasing (with respect to rM
in the sequential-move game when system S benefits
and rS ). It should be noted, however, that although
system M and system M encourages system S. Simi-
the performance of the first mover (system M) may be
lar logic explains why system M will perform better
lower in the sequential-move game, it does not mean
in the sequential-move game than in a simultaneous-
that its payoff (performance net of costs) is lower. In
move game when system S harms system M and sys-
fact, payoffs will be higher because it is choosing
tem M discourages system S.
the level of resources that maximizes its payoff in
Alternatively, when this expression is negative (i.e.,
each case.
when system S harms system M and system M
It is also helpful to know the level of performance
encourages system S, or when system S harms sys-
that is expected for the social planner; using this infor-
tem M and system M encourages system S), then
mation, we can compare the performance resulting
in the sequential-move game, system M chooses to
from sequential- and simultaneous-move games to
lower its own resources to alter system S’s resource
some societal standard. We summarize the compar-
choice. Thus, in this case, manipulating system S’s
isons in Result 2.
resource decision in its favor comes at a cost to
itself because rM (and, therefore, its own performance) Result 2. (a) If systems M and S both benefit each
must be lowered in order to do so. Thus, the perfor- other and both systems encourage each other, then
mance of system M may be higher or lower in the each system and the combined network underper-
sequential-move game than in the simultaneous-move form in the simultaneous-move game relative to the
game. We state this in the following result. social planner.
(b) If system M harms system S when sys- achieve a higher payoff (combined performance net
tem S benefits system M and both systems dis- of costs) relative to the equilibrium. Thus, the social
courage each other, then system S underperforms in planner will use its overall resources in the most cost-
the simultaneous-move game relative to the social effective way because it does not take into account
planner. The relationship between performance of the strategic “feedback” effect of how one system’s
system M and the combined network (relative to the resource choices will affect the incentives of the other
social planner) is ambiguous. system investing in resources.6 System operators are
(c) If system M benefits system S when sys- concerned with these effects and therefore will alter
tem S harms system M and both systems discour- their investment to distort the incentives of the other
age each other, then system M underperforms in systems to their own advantage.
the simultaneous-move game relative to the social In contrast to the simultaneous-move game, the
planner. The relationship between performance of sequential-move game is more complicated. As Propo-
system S and the combined network (relative to the sition 4 shows, resource allocations in the sequential-
social planner) is ambiguous. move game are often ambiguous relative to the social
(d) In all other cases (e.g., systems M and S are planner. For example, if system M and S’s resource
mutually harmful and both systems discourage each investments both benefit and encourage each other,
other), the impact of strategic interdependencies on system M chooses a higher level of resources (relative
performance is ambiguous. to the simultaneous-move game) to encourage sys-
Intuition into the above result can be obtained by tem S to invest more, which in turn benefits system M.
studying the case where both systems benefit each However, a social planner also chooses a higher level
other. If systems M and S both encourage each other, of resources (relative to the simultaneous-move game).
then performance in the simultaneous-move game Thus, the resources chosen may be higher or lower in
is always worse than under the social planner. This the sequential-move game relative to the level chosen
arises because, as Proposition 3 shows, the social plan- by a social planner. Consequently, the performance of
ner unambiguously chooses a higher level of resources each system may be higher or lower.
for both systems. Thus, performance is higher for each Given the ambiguity that arises, our results suggest
individual system as well as the overall combined net- that in some circumstances, regulating these resource
work for the social planner. When system M harms decisions through an external agency (such as a local
system S, when system S benefits system M, and when government or a state’s utility commission) may be
both systems discourage each other, the social planner more valuable than in others. Specifically, for situ-
chooses a higher level of resources for system S and ations such as those described in Results 2(a)–2(c),
a lower level of resources for system M than in the underperformance can be prevented through an exter-
simultaneous-move game. This later portion is crucial nal agency.
for understanding performance. By choosing a lower
level of resources, system M harms system S less than 5. A Practical Example and Issues
it does in the simultaneous-move game. Combining
5.1. Example
this with the fact that the social planner chooses a
The Port of New Orleans owns two 90-year old bridges
higher level of resources for system S, the performance
that are vertically movable, the Almonaster Avenue
is better for system S under the social planner. The
result for system M is ambiguous and hence so is the and Seabrook Railroad Bridges (Grisset 2008). Typi-
result for the combined network. The same reasoning cally, the spans are lowered to allow traffic to traverse
explains the outcome of Result 2(c).
6
It is worth noting that the combined performance Recall that these strategic effects are determined by whether a sys-
tem’s resources encourages or discourages the other’s investment
of both systems in the noncooperative equilibrium
choices. Further, as discussed earlier, the encourage/discourage
may be higher than that achieved by the social plan- distinction characterizes the marginal impacts of one system’s
ner. However, although this is true from the stand- resources on the other’s performance, which affects each other’s
point of performance, the social planner will always incentives for investment in their own performance.
and are otherwise raised to allow for port traffic to these decision makers to make inferences about how
cross. However, during particularly severe weather, the likely investment decisions and resulting perfor-
the spans must be lowered to prevent wind damage. mance compare to a more idealistic regime. In this
Lowering these bridges when the precipitation is high sense, it is similar in spirit to Varian (2004), who uses
effectively acts as a dam, and floodwalls upstream an analytical model to investigate how an individ-
overtop. Historically, however, whenever the bridges ual system’s reliability is affected by the individual
have been lowered during severe weather events, investment decisions of the various members of that
they have received minimal damage. Any infrastruc- system. Whereas Varian (2004) focuses on a single sys-
ture system upstream from the bridges is prone to tem, we focus on multiple interdependent systems.
flooding. This paper provides insight for high-level qualita-
Take the following possible investment decisions. tive assessments of the impacts of investment strategy
An upstream electric substation (ESS) is considering in interdependent systems. Furthermore, it illustrates
costly flood protection to reduce the impact from via a framework how a quantitative assessments
future storms. This investment is obviously not only could be achieved. A qualitative assessment alone
beneficial for the substation but also for the port may be valuable in many situations. As shown in the
because electricity is more reliable. Hence, the ESS’s New Orleans example, it can show how individual
system investments impact performance relative to
investment in flood protection benefits the port. Fur-
what a social planner would choose and the regula-
ther, these investments are likely to have a positive
tory strategies that may prove beneficial without pur-
impact on the marginal productivity of the port’s
suing a complicated quantitative assessment. This is
resources as well; therefore, the ESS’s investment
particularly valuable to decision makers who lack the
encourages the port’s investment.
time or the staffing to conduct more in-depth assess-
Regarding the port’s investment, the port is con-
ments. Relatedly, it provides decision makers with the
sidering upgrading some of the bridge’s aging com-
vocabulary to discuss the externalities from invest-
ponents to ensure that it can continue to withstand
ment decisions in an informed manner.
future storms. The plan would be to harden aging In a similar vein, theoretical reasoning is also valu-
abutments to better withstand scour. Larger abut- able because it helps researchers and decision makers
ments, however, further narrow the channel and determine which data and variables must be collected
cause more flooding upstream. Given this, we may and measured. Often, systems will not formally or
posit that the port’s investment harms the ESS. How- explicitly collect data on internal processes that tan-
ever, because the port’s abutments make the substa- gentially impact its overall system performance yet
tion’s flood protection even more necessary, the port affect dependent systems. For example, an electric
encourages investment in the ESS. utility knows (and publicly reports) how many cus-
Our model predicts that in both the simultaneous- tomers are without power. However, it likely does
move and sequential-move games, the port and the not collect localized data that measure outages at a
ESS may choose too much or too little investment particular water pumping station. From a regulatory
compared with investment decisions made by a social perspective of a coupled water-power system, how-
planner. Thus, there is no guarantee that privatizing ever, it might be helpful to know both the total num-
the two systems (separately) will yield investment ber of customers without power and how often the
outcomes that are optimal. water utility specifically was impacted. Arguably, the
reason why operators are not required to collect this
5.2. Issues data type is because these phenomena have yet to
As is evident from the previous example, our paper be clearly categorized. Thus, this framework provides
provides a clarifying framework to help decision a prelude into a quantitative assessment in numer-
makers who oversee multiple interdependent infras- ous ways.
tructures understand the environment in which oper- Although an empirical analysis of these issues
ators make investment decisions. To this end, the would be ideal, at this stage it is impossible for two
primary importance of this work is that it enables reasons. First, the data needed to conduct such a
study are practically nonexistent.7 In the bridge exam- 5. Are there regulatory dependencies? Physical
ple, the operational value of the bridge along with the dependencies? Economic or market dependencies?
maintenance costs are privately known by the port. 6. What other factors impact performance? Usage?
Second, when dealing with multiple interdependent Component age? Weather? Maintenance?
systems, it is not clear how their performance should 7. What sensors are deployed? What data are col-
be aggregated, especially if each system in the cou- lected? Can these data serve as a proxy for specific
pled network uses different metrics. Reliability, ser- indicator?
vice level, throughput, output, and life-cycle costs are 8. Once data are collected and system performance
just some of the performance criteria used by individ- evaluated, would subject matter experts agree with
ual systems, and each can have different meanings to the outcome of the evaluation? (If not, perhaps inap-
different sectors. In the bridge example, the port may propriate or insufficient indicators were chosen.)
value the bridge for its throughput and low mainte- Once these factors have been determined, these
nance cost. On the other hand, the power utility val- investment decisions will need to be related to per-
ues reliability. Perhaps the one performance indicator formance. The goal of performance functions in this
that unites both systems is profits. paper is to ultimately translate an individual sys-
In some situations, however, a more precise quan- tem’s resource investment into performance. In con-
titative calibration of system interdependency will be cept, the goal is straightforward. In practice, though,
necessary. In light of this, in what follows, we discuss this becomes more challenging. Regression models
how a quantitative exploration may be attempted. We may provide insight when developing performance
first provide suggestions for the type of data to collect function models, especially when repeated invest-
for a full case study. We then suggest two methods ments are made. For example, an electric power util-
for developing performance functions. ity should have accurate information on loss load
Because of the vast set of infrastructure sectors, it in a service area, and a transit agency in the same
is impossible for us to define all discretionary and service area may have quasi-accurate information on
nondiscretionary input and output data used to com- increased service time as a result of outages. Both
pute system performance.8 Rather, we provide a set agencies have information on their yearly investments
of questions for decision makers to enable them to in system upgrades and access to confounding fac-
gather richer data on investment decisions and hence tors that influence service, such as weather. From this
a better understanding of the environment that cou- data type, a regulator could develop a performance
pled systems create: function to examine the direct influence of a system’s
1. What specific aspects of the primary system’s investments on the other system. With sufficient data,
performance are most important to the primary sys- these descriptive models can be validated predictive
tem? What does the secondary system find impor- models. For examples, see Guikema et al. (2014) and
Black et al. (2002). Although regression models admit-
tant? What do regulators find important?
tedly require substantial data, the burgeoning deploy-
2. Which is prioritized more for this exercise: day-
ment of sensor technology in urban environments
to-day performance or performance after a rare and
may alleviate some of the data burdens.
disruptive event?
In situations where data are simply impossible
3. What are the boundaries of the region of
to gather (e.g., for reasons of privacy, security, or
interest?
expense) expert elicitation may offer great benefits.
4. What are the geographic dependencies? (Over-
For articles on the role of expert elicitation in risk
laying geographic network maps may be helpful.)
assessments of infrastructure systems, see Cooke and
7
Goossens (2004) and Ezell et al. (2000). However, it is
First, the data necessary to perform an assessment are often insuf-
ficiently or inconsistently collected, as discussed above. Second,
clear that more work needs to be done.
even when the data that are collected suffice, they are usually pri-
vately owned, classified, or otherwise unavailable. 6. Conclusions
8
For examples of infrastructure performance assessments, see Reilly The results of this paper identify the deviations
(2008), Nateghi et al. (2011), and de Oliveira et al. (2010). between what a social planner and a decision maker
of a privately owned infrastructure system would do. A primary goal of a regulator at the nexus of cou-
Although it is not surprising that there is a difference pled infrastructure systems would be to decrease the
between these two circumstances, our paper allows impacts of the strategic interactions or the strate-
us to study the relationship between the qualitative gic interactions themselves. First, a regulator could
characteristics of a network (benefits, encourages, etc.) help systems to see and potentially internalize how
and whether or not it will lead to underperformance. an investment will impact dependent systems and
Specifically, we find that because of the strategic inter- negotiate better outcomes. Second, by understand-
actions of decision makers, these private decisions ing the combined network and not having allegiances
will result in underperformance if both systems ben- to either, a regulator could recommend more effec-
efit and encourage each other’s investment, and in all tive investment and performance targets. The last
other cases, it leads to ambiguous performance rela- option reduces strategic interactions without impos-
tive to the planner. However, privatization never guar- ing investment or performance targets. In situations
antees overperformance given our model assumptions. where both systems benefit each other and at least
The implications of this finding are particularly one system encourages the other, regulators should
important because of recent calls to privatize U.S. instruct the systems to move sequentially and instruct
infrastructure. Although there are many advantages the system that encourages investment in the other
to privatization (Sheshinski and López-Calva 2003), to move first (even if the other system discourages
the strategic nature of decision makers suggests that investment). This will result in higher investment
underperformance is likely when any one privatized and better performance than when the systems invest
infrastructure is viewed in the larger context of inter-
simultaneously. In other situations, regulators should
dependent infrastructure systems. From a policy per-
assess whether systems investing simultaneously or
spective, these strategic interactions may be tempered
sequentially will result in higher performance.
by an external regulatory body, well-aligned incen-
Past literature on interdependent infrastructure
tives, or subsidies that promote mutually beneficial
focused primarily either on system failures stemming
investments. Furthermore, public–private partnerships
from dependencies or on identifying and quantifying
(PPPs) could be beneficial. These PPP arrangements
the dependencies themselves. By contrast, this paper
should have clear investment and performance targets
investigates how the strategic behavior of system
and should account for the impacts of the system on
operators will usually lead to underinvestment. We
dependent systems. In the absence of this, infrastructure
privatization may promote underperformance, which argue that this strategic behavior may be an additional
could offset other gains resulting from privatization. cause of chronic underinvestment in infrastructure.
The second policy implication stems from the fact Indeed, underinvestment is likely to be stronger when
that regulators typically regulate only one system there are greater interdependencies, and in the absence
(e.g., Federal Emergency Regulatory Commission, U.S. of these interdependencies, the private sector will
Department of Transportation) and rarely the nexus function as effectively as the social planner. Thus, fur-
of interdependent systems. We illustrate this regula- ther privatization, especially privatization that lacks
tory nexus through electric-power utilities. Many are systematic regulatory oversight, can promote subop-
mandated to prioritize power restoration after an out- timal investment and inhibit collective infrastructure
age event to certain priority customers including some performance under ordinary circumstances.
dependent critical infrastructure systems (e.g., hospi- We conclude by identifying some of the limitations
tals). When regulators do not fully oversee this nexus, and the scope for future work in light of our results.
however, they cannot lessen the strategic interactions First, results depend on whether coupled network’s
among interdependent systems and negotiate better investments are either beneficial or harmful This
outcomes. In this particular example, electric-power work was conducted while the first and third authors
utilities are not necessarily required to invest in mit- were employed by the Johns Hopkins University and
igation measures that reduce the likelihood of prior- encouraging or discouraging to the other (but not
ity customer outages in the first place and are still both). Admittedly, both types of dependencies may
empowered to act strategically. coexist; in this case, the net impact on performance is
unclear because of the duality of the competing events. Assumption A. The performance functions must satisfy the
For example, it is clear that dilapidated water following conditions:
pipes negatively impact colocated electric-power lines ¡M 4rM 1 rS 5
since they may break and flood. On the other hand, lim =0
rM → ¡r M
investments in cyber-system protection could shift

and
an adversary’s threat onto a dependent system or ¡S 4rS 1 rM 5
lim = 01
could strengthen the cyber relationship between the rS → ¡r S
two interdependent systems. Nevertheless, our model and M 4 · 5 and S 4 · 5 should be sufficiently concave. Given these
suggests that investigating whether a system bene- assumptions, let
fits or harms or whether it encourages or discourages ¡M 4rM 1 rˆS 4rM 55
another system’s investment is an important charac- Y 4rM 5 = − cM 0
¡r M
teristic that needs to be considered. Thus, we believe
that future work should empirically identify and mea- Recall that rˆS 4rM 5 is the best response of the secondary system.
Thus, Y 4rM 5 is the first-order condition of the main system’s
sure the type of interdependencies discussed in this
resource choice, written as a composite function. We now prove
paper, given their policy relevance. existence in the following steps.
A second limitation is that we assume that the First, we show that Y 4rM 5 is strictly decreasing in rM . Taking
operators of each system are single entities. However, the derivative, we have
a hierarchy of individuals may operate each of the ¡ 2 M 4rM 1 rˆS 4rM 55 ¡ 2 M d rˆS
systems. If the actions of the individuals cannot be Y 0 4rM 5 = 2
− 0
¡r M ¡r M ¡r S dr M
observed, then moral hazard may arise (as in Samuel
and Guikema 2012), which will lead to further dis- The first term in the previous expression is always negative. The
second term is also always negative except in the case where both
tortions of this system. Furthermore, this asymmetric
systems encourage each other or both discourage each other. Thus,
information may also affect the ability of the social as long as M 4 · 5 is sufficiently concave, the above expression
planner to implement the optimal level of resources. is monotonically decreasing in rM . (Note that the assumption of
Third, we focus on the qualitative interdependency “sufficient concavity” is only needed when both systems encour-
between the two systems and do not focus on the age or discourage each other. In all other cases, Y 4rM 5 is unam-
strength of the relationship. Our model, however, biguously decreasing in rM .)
can be easily extended to incorporate the strength Second, as rM → , Y 4rM 5 < 0, given Assumption A. Fur-
thermore, our assumption that the first-order condition of the
of the relationship. For example, the performance of main system is strictly positive at rS = 0 and as rM approaches 0
the main system may be expressed as M 4rM 1 r S 5, ensures that there exists an rM such that Y 4rM 5 > 0 to some rS .
where the parameter ∈ 601 17 could capture the Third, given that Y 4rM 5 is a continuous and monotonically
∗ ∗
strength of the spillover effect of the secondary sys- decreasing function, there exists an rM where Y 4rM 5 = 0. By
∗
tem’s resources on the main system. With = 0, the definition, rM is a best response to rˆS 4rM 5, which in turn is a best re-
secondary system would have no spillover, whereas sponse to rM . Hence, we have a unique Nash equilibrium. Q.E.D.
=1 would represent a strong spillover effect. A sim- Proof of Proposition 1. Recall that ¡ M 4 · 5/¡r M is pos-
ilar extension could also be used to capture the itive by assumption. Thus, the second term in Equation (6)
(4¡ M 4 · 5/¡r S 54d rˆS /dr M 55 is positive if ¡ M 4 · 5/¡r S > 0 and
strength of the relationship of rM on the secondary
d rˆS /dr M > 0 or if ¡ M 4 · 5/¡r S < 0 and d rˆS /dr M < 0. If,
system’s performance. We leave these extensions for instead, ¡ M 4 · 5/¡r S > 0 and d rˆS /dr M < 0 or if ¡ M 4 · 5/¡r S
future research in this area. < 0 and d rˆS /dr M > 0, then this second term in Equation (6)
is negative. Our result then follows from Definitions 1
Acknowledgments and 2. Q.E.D.
This work was conducted while the first and third authors
were employed by the Johns Hopkins University. Proof of Proposition 2. Here, ¡ M 4 · 5/¡r M is positive
by assumption. The second term in Equation (6) is positive
Appendix if ¡ M 4 · 5/¡r S > 0 and d rˆS /dr M > 0 or if ¡ M 4 · 5/¡r S < 0 and
Proof of the existence of a Nash equilibrium 4simultaneous- d rˆS /dr M < 0. Thus, the sum of the terms in Equation (6)
move game52 To ensure the existence of a unique Nash equi- is greater than the term in Equation (4). Conversely, the
librium in every case (benefits versus harms and encourages second term in Equation (6) is negative if ¡ M 4 · 5/¡r S > 0
versus discourages), we make the following assumption. and d rˆS /dr M < 0 or if ¡ M 4 · 5/¡r S < 0 and d rˆS /dr M > 0. Thus,
the sum of the terms in Equation (6) is less than the term Figure A.1b System M Discourages System S, System S Discourages
in Equation (4). Our result then follows from Definitions 1 System M, and Systems M and S Benefit Each Other
and 2. Q.E.D.
rM
Proof of Proposition 3. First, we provide an analytical
approach to prove 1 of the 16 cases presented in Proposi- rS,Soc(rM)

tion 3. Second, we provide a graphical approach to prove
rS, Sim(rM)
four of the cases. The graphical approach is more intuitive.
The remaining 11 cases follow the same logic and are not
shown. We use the notation rˆM1 Soc 4rS 5 and rˆS1 Soc 4rM 5 to refer
to the implicit function that is defined respectively by Equa- rM, Soc(rS)
tions (8) and (9), the social planner’s first-order conditions rM,Sim(rS)
to rM and rS . Note that rˆM1 Soc 4rS 5 and rˆS1 Soc 4rM 5 are not best
response functions for the social planner. rS
In case 1, system M and S’s resource investments ben- ∗
Note. The result of this scenario is that rM1 ∗ ∗ ∗
Soc Ñ rM1 Sim and rS1 Soc Ñ rS1 Sim .
efit each other (i.e., ¡ M 4 · 5/¡r S > 0, and ¡ S 4 · 5/¡r M > 0),
and system M and S’s resource investments encourage each
other (i.e., d rˆS /dr M > 0 and d rˆM /dr S > 05:
1. Assume f −1 4¡ rˆS /¡r M 5 > d rˆM /dr S , that for all rM and
∗ ∗
rS , rˆS1 Soc 4rS 5 ≈ rˆS1 Sim 4rS 5. Therefore, rM1 Soc > rM1 Sim . When Figure A.1c System M Encourages System S, System S Encourages
∗ ∗ ∗ ∗
rM1 Soc > rM1 Sim and d rˆS /dr M > 0, then rS1 Soc > rS1 Sim . System M, System M Harms System S, and System S
2. Assume d rˆS /dr M > d rˆM /dr S , that for all rM and Benefits System M
∗ ∗
rS , rˆM1 Soc 4rS 5 ≈ rˆM1 Sim 4rS 5. Therefore, rS1 Soc > rS1 Sim . When
∗
rS1 > r ∗
and d r /dr > 0, then r ∗
> r ∗ rM
Soc S1 Sim ˆM S M1 Soc M1 Sim .
∗ ∗ rS, Soc(rM) rS,Sim(rM)
3. Because rM1 Soc > r M1 Sim is true in both (1) and (2), then
rM, Soc(rS)
system M is expected to underinvest.
4. Because rM1 ∗ ∗ rM, Sim(rS)
Soc > rS1 Sim is true in both (1) and (2), then
system S is expected to underinvest. Q.E.D.
Of the 16 cases, we show cases 2, 3, 4, and 5 graphically
in Figures A.1a, A.1b, A.1c, and A.1d, respectively.
Proof of Proposition 4. Similar to Proposition 3,
a graphical proof is more intuitive. Two cases of 16 are
shown in Figures A.2a and A.2b. The remaining 14 follow rS
the same logic. Note that we use the notation rˆM1 Soc 4rS 5 and Note. The result of this scenario is that r ∗
Ñr ∗
and rS1∗ Soc Ñ rS1∗ Sim .
M1 Soc M1 Sim
rˆS1 Soc 4rM 5 to refer to the implicit function that is defined by
Equations (8) and (9), the social planner’s first-order condi-
tions to rM and rS .
Figure A.1d System M Encourages System S, System S Discourages

Figure A.1a System M Discourages System S, System S Encourages System M, System M Harms System S, and System S
System M, and Systems M and S Benefit Each Other Benefits System M
rM rM
rM, Soc(rS) rM,Soc(rS)
rS, Soc(rM)
rM,Sim(rS) rM, Sim(rS)
rS, Soc(rM) rS, Sim(rM)
rS, Sim(rM)
rS rS
∗ ∗ ∗ ∗
Note. The result of this scenarios is r M1 Soc >r M1 Sim and r S1 Soc Ñr S1 Sim . Note. The result of this scenario is that r ∗
M1 Soc Ñr ∗
M1 Sim and rS1∗ Soc < rS1∗ Sim .
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10] On: 04 October 2015, At: 06:25

“Gaming the System”: Decision Making by Interdependent

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“Gaming the System”: Decision Making by

Interdependent Critical Infrastructure

1. Introduction explanation for government-operated infrastructure,

Definition 2. If focuses on purely economic interdependencies (e.g.,

¡r S ¡r M the marginal benefit of the main system’s resources,

reliability improvements—specifically, underground- encourages resource investment by system S). That

maximization problem satisfies system, whereas in the sequential-move game, the

and on its performance.

ditions under which system M’s performance will

investments in cyber-system protection could shift

approach to prove 1 of the 16 cases presented in Proposi- rS,Soc(rM)

Figure A.1d System M Encourages System S, System S Discourages

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