The Economics of Hacking

Abstract

Hacking is becoming more common and dangerous. The challenge of dealing with hacking often comes from the fact that much of our wisdom about conventional crime cannot be directly applied to understand hacking behavior. Against this backdrop, this essay reviews hacking studies, with a focus on discussing the new features of cyber-crime and how they affect the application of classical economic theory of crime in the cyberspace. Most findings of hacking studies can be interpreted with a parsimonious demand and supply framework. Hackers decide whether and how much to “supply” hacking by calculating the return on hacking over other opportunities. Defenders optimally tolerate some level of hacking risks because defense is costly. This tolerance can be interpreted as an indirect “demand” for hacking. Variations in law enforcement, hacking benefits, hacking costs, legal alternatives, private defense, and the dual use problem can variously affect the supply or demand for hacking, and in turn the equilibrium observation of hacking in the market. Overall, this essay suggests that the classical economic theory of crime remains a powerful framework to explain hacking behaviors. However, the application of this theory calls for considerations of different assumptions and driving forces, such as psychological motives and economies of scale in offenses, that are often less prevalent in conventional (offline) criminal behaviors, but that tend to underscore hacking in the cyberspace.