The Economics of Cyber Crime

Digital technologies are creating more value and thus becoming more attractive to cyber criminals. Gary Becker provides a philosophy for understanding crimes from an economic perspective, but criminal behavior and potential policies against it differ in the context of a digital economy. Criminals with economic incentives are expected to hack digital systems and ask for a ransom to not disturb those compromised. We model the interactions between attackers and defenders with a dynamic Bayesian game. There are two processes. The first is the attackers' learning about the distribution of the defenders' level of defense, and the second is the attackers' reputation building based on being honest after being paid. The attackers' dynamic decision is captured by a bandit process. The defenders' behavior exerts externalities on themselves by influencing the attackers' behavior. We explore policies that could enhance social welfare through moderating these externalities.