A Linear Quadratic Differential Game Approach to Dynamic Contract Design for Systemic Cyber Risk Management under Asymmetric Information

Juntao Chen, Quanyan Zhu

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

In this paper, we consider a delegated dynamic systemic cyber risk management problem between a resource owner (principal) and a risk manager (agent). The principal can only observe cyber risk outcomes of the network rather than the efforts that the agent spends on protecting the resources. Under this asymmetric information, the principal aims to minimize the systemic cyber risks by designing a dynamic contract that specifies the compensation flows and the anticipated efforts of the manager by taking into account his incentives and rational behaviors. We formulate a bi-level mechanism design problem for dynamic contract design which can be seen as a special class of differential game. We show that the principal has rational controllability of the systemic risk by designing an incentive compatible estimator of the agent's hidden efforts. We characterize the optimal mechanism design by reformulating the problem into a stochastic optimal control program and derive the solution explicitly. We further reveal a separation principle for dynamic risk management where the effort estimation and the compensation design can be achieved separately.

Original languageEnglish (US)
Title of host publication2018 56th Annual Allerton Conference on Communication, Control, and Computing, Allerton 2018
PublisherInstitute of Electrical and Electronics Engineers Inc.
Pages575-582
Number of pages8
ISBN (Electronic)9781538665961
DOIs
StatePublished - Feb 5 2019
Event56th Annual Allerton Conference on Communication, Control, and Computing, Allerton 2018 - Monticello, United States
Duration: Oct 2 2018Oct 5 2018

Publication series

Name2018 56th Annual Allerton Conference on Communication, Control, and Computing, Allerton 2018

Conference

Conference56th Annual Allerton Conference on Communication, Control, and Computing, Allerton 2018
CountryUnited States
CityMonticello
Period10/2/1810/5/18

ASJC Scopus subject areas

  • Computer Networks and Communications
  • Hardware and Architecture
  • Signal Processing
  • Energy Engineering and Power Technology
  • Control and Optimization

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  • Cite this

    Chen, J., & Zhu, Q. (2019). A Linear Quadratic Differential Game Approach to Dynamic Contract Design for Systemic Cyber Risk Management under Asymmetric Information. In 2018 56th Annual Allerton Conference on Communication, Control, and Computing, Allerton 2018 (pp. 575-582). [8636007] (2018 56th Annual Allerton Conference on Communication, Control, and Computing, Allerton 2018). Institute of Electrical and Electronics Engineers Inc.. https://doi.org/10.1109/ALLERTON.2018.8636007