An economic analysis of regulating security investments in the Internet

Regulating the ISPs to adopt more security measures has been proposed as an effective method in mitigating the threats of attacks in the Internet. However, economic incentives of the ISPs and the network effects of security measures can lead to an under-investment in their adoption. We study the potential gains in a network´s social utility when a regulator implements a monitoring and penalizing mechanism on the outbound threat activities of autonomous systems (ASes). We then show how freeriding can render regulations futile if the subset of ASes under the regulator´s authority is smaller than a threshold. Finally, we show how heterogeneity of the ASes affect the responses of the ISPs and discuss how the regulator can leverage such information to improve the overall effectiveness of different security policies.