Institutional design, game dilemmas and rule restructuring: the evolution and optimization of China’s multi-level protection scheme of cybersecurity

Against the backdrop of China’s digital transformation, the Multi-Level Protection Scheme (MLPS) has evolved into the core institutional pillar of the nation’s cybersecurity governance, yet its implementation confronts severe market dysfunctions, including cut-throat price competition and degradation of evaluation quality. This study undertakes a systematic examination of the three-decade evolution of China’s MLPS, delineating it into foundational, legalization, and strengthening stages, thereby revealing its core institutional logic centered on the “balancing cybersecurity and digital development.” Drawing on an interdisciplinary framework integrating institutional economics, administrative law, and game theory, this study unpacks the deep-rooted strategic dilemmas driving market distortions in the MLPS evaluation ecosystem. These dilemmas encompass the Prisoner’s Dilemma among evaluation institutions, information asymmetry between regulators and institutions, misalignment of interests within multi-layer principal-agent relationships, and the absence of repeated game mechanisms. Leveraging empirical data on MLPS evaluation institutions and regulatory penalties spanning from 2017 to 2025, the study identifies the institutional roots of market distortions, attributing it primarily to deficient incentive and constraint mechanisms. Consequently, it proposes a systematic optimization path anchored in the principles of proportionality, reliance protection, and the accountability, involving substantive rule restructuring and complementary implementation mechanisms. This study addresses a notable gap in the literature by systematically theorizing the interplay between MLPS institutional design and market outcomes. Furthermore, it offers an empirically grounded Chinese perspective on the evolution of cybersecurity governance, with actionable implications for jurisdictions seeking to balance security mandates with market efficiency in digital transformation.