Economic Impacts of Rules- versus Risk-Based Cybersecurity Regulations for Critical Infrastructure Providers

Abstract

What's the optimal way to regulate cybersecurity for the critical infrastructure operators in charge of electricity transmission? Should regulation follow the US style (a mostly rules-based model), the EU approach (which is mostly risk-based), or a balance of both? The authors discuss the economic issues behind making this choice and present a cybersecurity economics model for public policy in the presence of strategic attackers. They calibrated these models in the field with the support of National Grid, which operates in the UK and on the US East Coast. The model shows that optimal choices are subject to phase transitions: depending on the combination of incentives, operators will stop investing in risk assessment and only care about compliance (and vice versa). This finding suggests that different approaches might be more appropriate in different conditions and that just pushing for more rules could have unintended consequences.