Knowledge sharing and investment decisions in information security
Authors: Liu, Dengpan; Ji, Yonghua; Mookerjee, Vijay
Journal: Decision Support Systems (2011)
DOI: 10.1016/j.dss.2011.05.007
We study the relationship between decisions made by two similar firms pertaining to knowledge sharing and investment in information security. The analysis shows that the nature of information assets possessed by the two firms, either complementary or substitutable, plays a crucial role in influencing these decisions. In the complementary case, we show that the firms have a natural incentive to share security knowledge and no external influence to induce sharing is needed. However, the investment levels chosen in equilibrium are lower than optimal, an aberration that can be corrected using coordination mechanisms that reward the firms for increasing their investment levels. In the substitutable case, the firms fall into a Prisoners' Dilemma trap where they do not share security knowledge in equilibrium, despite the fact that it is beneficial for both of them to do so. Here, the beneficial role of a social planner to encourage the firms to share is indicated. However, even when the firms share in accordance to the recommendations of a social planner, the level of investment chosen by the firms is sub-optimal. The firms either enter into an “arms race” where they overinvest or reenac…