Contagion Effects of Heterogeneous Cyber Risk on Network Security and Systemic Stability

Understanding how heterogeneous cyber risk shapes security investments and contagion is a key challenge for the resilience of interconnected digital systems. Existing studies on cybersecurity investments and network contagion typically rely on homogeneous assets, uniform attack incentives, or non-strategic threat propagation. We develop a Stackelberg security game that combines contagion dynamics with heterogeneous cyber risk, allowing attackers and defenders to assign different values to network nodes, reflecting differences in asset criticality, information, and objectives. We characterize the equilibrium allocation of cybersecurity investments and derive an analytical approximation for the optimal defense strategy based on endogenous network protection metrics. We show that cyber-risk heterogeneity significantly affects attack incentives and resource allocation, while neglecting it leads to systematic defense misallocation. Our results suggest that cybersecurity policies should leverage both actual and perceived differences in node criticality, as cyber-deception mechanisms can create strategic misperceptions that redirect attacks and enhance systemic resilience.