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The potential for underinvestment in internet security: implications for regulatory policy

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  • Alfredo Garcia

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  • Barry Horowitz

    ()

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    Abstract

    With the continuing growth of the use of the Internet for business purposes, the consequences of a possible cyber attack that could create a large scale outage of long time duration becomes a more and more serious economic issue. In this paper, we construct a game-theoretic model that addresses the economic motivations for investment in added Internet security and makes a case for a possible market failure in the form of underinvestment in the provision of Internet security. This result relies on the fact that the social value derived from consumption (which is at least equal to a fraction of the surplus derived from e-commerce) greatly exceeds the revenue at stake associated with the telecommunications companies’ and ISP’s security levels. If the ratio of social value to revenue at stake to Internet providers continues to grow, the likelihood of underinvestment in security becomes higher and some form of regulation may become necessary. We discuss the difficulties associated with designing and enforcing a regulatory scheme based upon mandatory security standards. Copyright Springer Science+Business Media, LLC 2007

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    File URL: http://hdl.handle.net/10.1007/s11149-006-9011-y
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    Bibliographic Info

    Article provided by Springer in its journal Journal of Regulatory Economics.

    Volume (Year): 31 (2007)
    Issue (Month): 1 (February)
    Pages: 37-55

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    Handle: RePEc:kap:regeco:v:31:y:2007:i:1:p:37-55

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    Web page: http://www.springerlink.com/link.asp?id=100298

    Related research

    Keywords: Internet Security; Market Failure; Game Theory; Nash Equilibrium; Markov perfect equilibrium; L51; L86; C72; C73; K23;

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    1. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(4), pages 659-79, November.
    2. Giovannetti, E., 2000. "Perpetual Leapfrogging in Bertrand Duopoly," Cambridge Working Papers in Economics 0012, Faculty of Economics, University of Cambridge.
    3. Esther Gal-Or & Anindya Ghose, 2005. "The Economic Incentives for Sharing Security Information," Industrial Organization, EconWPA 0503004, EconWPA.
    4. Martin Cave & Robin Mason, 2001. "The Economics of the Internet: Infrastructure and Regulation," Oxford Review of Economic Policy, Oxford University Press, vol. 17(2), pages 188-201, Summer.
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    Cited by:
    1. Liao, Chun-Hsiung & Chen, Chun-Wei, 2014. "Network externality and incentive to invest in network security," Economic Modelling, Elsevier, vol. 36(C), pages 398-404.

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