Cyber Risk and Security Investment

Toni Ahnert, Michael Brolley, David Cimon and Ryan Riordan

Staff Working Papers from Bank of Canada

Abstract: We develop a model in which firms invest in cybersecurity to protect themselves and their clients from cyber attacks. Since cyber security investment is unobservable, firms may signal their investment to attract clients. In equilibrium, firms under-invest in cyber security. We derive testable implications for the modality of cyber attacks, the probability of a successful attack, and client fees. To improve efficiency, a regulator can impose a minimum level of security investment or legislate consumer protection that shifts the burden of cyber attacks from clients to firms. Both regulations induce firms to invest the constrained-efficient amount in cyber security.

Keywords: Economic models; Financial services; Financial stability; Financial system regulation and policies; Payment clearing and settlement systems (search for similar items in EconPapers)
JEL-codes: D78 D81 G18 G21 G23 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2022-07
New Economics Papers: this item is included in nep-ban and nep-pay
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Citations: View citations in EconPapers (1)

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Working Paper: Cyber Risk and Security Investment (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:22-32

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