This study examines a critical incentive alignment issue facing FS-ISAC (the information sharing alliance in the financial services industry). Failure to encourage members to share their IT security-related information has seriously undermined the founding rationale of FS-ISAC. Our analysis shows that many information sharing alliances’ membership policies are plagued with the incentive misalignment issue and may result in a “free-riding” or “no information sharing” equilibrium. To address this issue, we propose a new information sharing membership policy that incorporates an insurance option and show that the proposed policy can align members’ incentives and lead to a socially optimal outcome. Moreover, when a transfer payment mechanism is implemented, all member firms will be better off joining the insurance network. These results are demonstrated in a simulation in which IT security breach losses are compared both with and without participating in the proposed information sharing insurance plan.
Liu, C. Z., Zafar, H., & Au, Y. A. (2014). Rethinking FS-ISAC: An IT Security Information Sharing Network Model for the Financial Services Sector. Communications of the Association for Information Systems, 34, pp-pp. https://doi.org/10.17705/1CAIS.03402