Join Up or Stay Away? Coalition Formation for Critical IT Infrastructure

Abstract

PRACTICE AND POLICY ABSTRACT We consider the formation of a coalition when districts invest in critical IT infrastructure that, if disrupted, can cause significant damage to security, the economy, public health, or safety. The benefits from these investments can spill over to other districts. Districts choose whether to participate in a coalition, and the coalition subsequently makes IT infrastructure investment decisions for those districts that join the coalition. These inside districts have superior interoperability in their spillovers relative to outside districts. We find that inside districts’ resource levels decrease with the size of the coalition, and this size depends on the coalition’s economies of scale and relative interoperability. Depending on these factors, any size coalition can be an equilibrium or socially optimal. In most cases, the socially optimal coalition size is larger than the equilibrium coalition. A subsidy or tax can incentivize the equilibrium coalition size and district investment levels to be socially optimal, providing a general solution to the provisioning of critical IT infrastructure. We use the European Union’s Digital COVID Certificate program providing vaccine status information and the U.S. Government’s Direct Project that supports the establishment of nationwide health information exchanges to illustrate elements of our model.