Covenants Without the Sword: Market Incentives for Cybersecurity Investment

Abstract

Two decades of economics research has repeatedly made the assertion that organizations as well as individuals do not have adequate incentive to invest in cybersecurity. Absent security, associated costs are imposed on third parties rather than producers of insecurity. Cybersecurity is thus a private good with externalities, one that will require regulation to prevent market failure. Underlying this body of research is the assumption that all organizations have the same business drivers, a similar attack surface, and a uniformly informed consumer base. This paper questions these assumptions and outlines seven naturally occurring incentives for organizations to invest in cybersecurity. Furthermore, I provide examples of how these incentives have driven investment in cybersecurity across different sectors. While the applicability of these incentives differs both across and within sectors, any cybersecurity public policy interventions must consider the resulting nuances. Cybersecurity covenants established absent the sword of regulation may be both more effective and sustainable, as they evolve with the experience and exposure of the stakeholders.