The economics of electronic identification platforms

Identification of individuals is a prerequisite for a well-functioning economy and society at large. Traditional means of identification are physical, such as passports. Electronic identification (eID) technologies are fundamentally different – they allow for identification without attendance. These technologies are currently being rolled out across modern economies. The European Union has recently passed an ambitious plan (eIDAS 2.0) that all citizens shall have an eID and accompanying digital wallet within few years. This transition from physical to electronic identification promises benefits in terms of significantly lower transaction costs, but also comes with potential costs in terms of heightened risks of identity fraud. Society faces a trade-off between the two. In addition comes the issue of digital exclusion – as society is increasingly based on eID, it is of paramount importance that all citizens actually have an eID that is applicable in their country of residence and can be used across borders. To date, the issues around eID implementation have largely been studied from the perspective of law. This project aims to study the trade-offs involved from the perspective of economics. There are two main questions Econ eID aims to address: 1. What, if any, frictions prevent a decentralized market for eID solutions from providing socially efficient outcomes in terms of low transaction costs, inclusion, and ID-security? 2. What characterizes optimal public policy with respect to the societal rollout of eID solutions? To answer these questions, Econ eID will combine insights from economic theory with advice from legal experts and experience from Norway and Sweden, two countries that have come far in implementing eID solutions using largely market-based solutions.

With the transition to digital economies, electronic identification (eID) can drastically cut transaction costs by facilitating quick verification of identities. Norway and Sweden are leaders in implementing eID. The European Union plans to provide all its citizens with a personal eID in line with its ambitious European Digital Identity Framework. Experience shows that eID implementation comes with downside risks. ID fraud is one. Norway has seen consumer credit fraud, social benefit extraction and company account manipulations using stolen eIDs. Exclusion is another. Some groups become digitally excluded as they never obtain an eID. Existing knowledge on eID primarily stems from law and technical engineering disciplines. But the issues of eID implementation are of an economic nature too. EID rollout implies interaction between the government, eID technology developers, and eID users. Sweden and Norway to date use private eID platforms (BankID) who maximize their own payoffs subject to regulatory constraints. Citizens and firms choose how to use eID, given the regulatory constraints and the contract offered by the eID provider. This setting is one of a market with network externalities, resemblant to those studied in platform economics. The research project Econ eID will develop an economic theoretical framework to analyze societal eID implementation. The project will combine platform economics and principal agent-theory with insights from law. Thereby, we shall address two main questions: 1. What, if any, frictions prevent a decentralized market for eID solutions from providing socially efficient outcomes in terms of low transaction costs, inclusion, and ID-security? 2. What characterizes optimal public policy with respect to the societal rollout of eID solutions? The project will study optimal fee-structures in a decentralized market, hurdles to secure technology and user diligence, and how to promote digital inclusion in the sense that all citizens have an eID.