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Why information security law has been ineffective in addressing security vulnerabilities: Evidence from California data breach notifications and relevant court and government records

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  • Park, Sangchul

Abstract

Why has the information security law been unsuccessful in having firms in possession of personal data take precautions against data breaches? Why are data breaches becoming more devastating notwithstanding law enforcement? This article seeks an answer from the legal system’s failure to draw a line between agency problems and externalities inherent in the information security market. Although a firm’s misaligned incentive to invest in security measures is basically an agency problem to be addressed by data breach litigation, the U.S. courts’ reluctance to grant Article III standing has reduced potential plaintiffs’ chance of winning and propensity to litigate, impairing the functionality of the private enforcement. As an exception, security vulnerabilities can have the nature of negative externalities to be addressed by the public enforcement, to the extent that those in “key holders” such as payment card processors enable intruders to easily circumvent the security measures taken by other firms in the same security chain, and that those in massive data aggregators undermine public trust in the whole data infrastructure. Government regulations, which need to be targeted at such sources of negative externalities, have actually been misaimed at a few cases arising from conventional agency problems. To test these hypotheses, this article presents an empirical study of security breach notifications filed in California during 2012–2016 and relevant court and government agency records produced until 2018.

Suggested Citation

  • Park, Sangchul, 2019. "Why information security law has been ineffective in addressing security vulnerabilities: Evidence from California data breach notifications and relevant court and government records," International Review of Law and Economics, Elsevier, vol. 58(C), pages 132-145.
    • Handle: RePEc:eee:irlaec:v:58:y:2019:i:c:p:132-145
    DOI: 10.1016/j.irle.2019.03.007
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    References listed on IDEAS

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    Cited by:

    1. Jens Foerderer & Sebastian W. Schuetz, 2022. "Data Breach Announcements and Stock Market Reactions: A Matter of Timing?," Management Science, INFORMS, vol. 68(10), pages 7298-7322, October.
    2. Igor Okhrimenko & Valery Stepenko & Olga Chernova & Elena Zatsarinnaya, 2023. "The impact of information sphere in the economic security of the country: case of Russian realities," Journal of Innovation and Entrepreneurship, Springer, vol. 12(1), pages 1-18, December.
    3. Ben Krishna & Satish Krishnan & M. P. Sebastian, 2023. "Examining the Relationship between National Cybersecurity Commitment, Culture, and Digital Payment Usage: An Institutional Trust Theory Perspective," Information Systems Frontiers, Springer, vol. 25(5), pages 1713-1741, October.

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    More about this item

    Keywords

    Information security law; Cybersecurity law; Data breach litigation; Data breach notification; Data protection; Article III standing; Public and private enforcement; Class action;
    All these keywords.

    JEL classification:

    • K24 - Law and Economics - - Regulation and Business Law - - - Cyber Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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