Incentives for investments in defensive technology: An economic analysis of the Safety Act

Civilian targets of terrorist or criminal attacks (e.g., sport stadiums, chemical or nuclear industry; infrastructure such as ports or pipelines) are often owned by the private agents who choose how to guard against potential attacks. This creates an important externality problem, as some of the benefits of better protection accrue to other private agents who would suffer from an attack. We analyze a model in which a social planner wants to provide incentives for the deployment of defensive technologies. Our results show that some features of the Safety Act, enacted after the 2001 terror attacks, are probably counterproductive.