The Burden of Proof in Electronic Commerce Security Breaches and the Optimal Security Investment of Firms

Abstract

This study investigates the consequences of two alternative legal systems on e-commerce security in terms of the burden of proof. The paper analyzes corollaries of the two alternative e-commerce regulations by comparing the profits of e-commerce firms and their optimal levels of investment in security. We find, based on our analytical models, that in a market in which the efficiency of the security investment is high, a legal framework that imposes the burden of proof on the firm enables firms to achieve higher profits than a legal framework that places the onus on the customer in equilibrium. In addition, we find that, depending on the range in efficiency of security investments of a market, the e-commerce law that imposes the burden of proof on the firm can lead firms to be more profitable, even when the firms invest less in security in equilibrium, compared with firms under the law that imposes the burden of proof on the customer.