Financial companies’ strategic behaviour as response to cyber crime, especially in regard to over-spending on defence measures and chronic under-reporting, has also an important consequence at overall sector and society levels, potentially driving the cost of cyber crime even further upwards.

Most of these costs are not driven by the number of cyber crime incidents experienced by financial companies but rather by the way financial companies choose to go about in protecting their business interests and market positioning in the presence of cyber crime. Specifically, shifts in financial companies’ strategic priorities, having the protection of customer trust and loyalty as a key objective, together with considerations related to market positioning vis-à-vis competitors are important factors in determining the cost of cyber crime. Consistent with recent findings, our results show that strong dynamic relationships, amongst tangible and intangible factors, affect cyber crime cost and occur at different levels of society and value network. This paper puts forward a multi-level model, based on system dynamics methodology, to understand the impact of cyber crime on the financial sector. In addition, this article provides a discussion of existing actions by the US federal government that should be more effectively utilized before, or at least in conjunction with, considering new government incentives/regulations for increasing cybersecurity investments by private sector firms. The implications of these findings are also discussed in this article, as well as a formal analysis of these implications.

The analysis provided in the article shows that the potential for government incentives/regulations to increase cybersecurity investments by private sector firms is dependent on the following two fundamental issues: (i) whether or not firms are utilizing the optimal mix of inputs to cybersecurity, and (ii) whether or not firms are able, and willing, to increase their investments in cybersecurity activities. The primary objective of this article is to develop an economics-based analytical framework for assessing the impact of government incentives/regulations designed to offset the tendency to under-invest in cybersecurity related activities by private sector firms.

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