Incentivizing Secure Software Development: The Role of Voluntary Audit and Liability Waiver

Misaligned incentives in secure software development have long been a challenge in security economics. Product liability, a powerful legal framework in other industries, has been largely ineffective for software products until recent times. However, the rapid regulatory responses to recent global cyber attacks by both the US and EU, together with the (relative) success of the General Data Protection Regulation in defining both duty and standard of care for software vendors, may enable regulators to use liability to re-align incentives for the benefit of the digital society. The United States National Cybersecurity Strategy suggests shifting responsibility for cyber incidents back to software vendors and proposes the concept of the liability waiver: if a software company voluntarily undergoes and passes an IT security audit, its future product liability is (fully or partially) waived. This article examines this audit-liability framework from both vendor and auditor perspectives. For vendors, we model the decision process as a sequential problem: a vendor must pass an audit to release a product and can attempt the audit multiple times. We show that the optimal strategy for an opt-in vendor is to never quit and to exert cumulative investments in either a “one-and-done” or “incremental” manner. For auditors, we explore how to design audits that encourage voluntary participation while maximizing vendor effort. We further investigate dynamic audit designs that can amplify vendors’ cumulative investments in security. Our findings provide insights into how liability waivers and audit strategies can re-align incentives, fostering a more secure digital ecosystem.