Why information security is hard - an economic perspective

According to one common view, information security comes down to technical measures. Given better access control policy models, formal proofs of cryptographic protocols, approved firewalls, better ways of detecting intrusions and malicious code, and better tools for system evaluation and assurance, the problems can be solved. The author puts forward a contrary view: information insecurity is at least as much due to perverse incentives. Many of the problems can be explained more clearly and convincingly using the language of microeconomics: network externalities, asymmetric information, moral hazard, adverse selection, liability dumping and the tragedy of the commons.

1 Introduction

In a survey of fraud against autoteller machines [4], it was found that patterns of fraud depended on who was liable for them. In the USA, if a customer disputed a transaction, the onus was on the bank to prove that the customer was mistaken or lying; this gave US banks a motive to protect their systems properly. But in Britain, Norway and the Netherlands, the burden of proof lay on the customer: the bank was right unless the customer could prove it wrong. Since this was almost impossible, the banks in these countries became careless. Eventually, epidemics of fraud demolished their complacency. US banks, meanwhile, suffered much less fraud; although they actually spent less money on security than their European counter-parts, they spent it more effectively [4].