Understanding Partnership Formation and Repeated Contributions in Federated Learning: An Analytical Investigation

Abstract

Limited access to large-scale data is a key obstacle to building machine learning (ML) applications in practice, partly due to a reluctance of information exchange among data owners out of privacy and data security concerns. To address this “information silo” problem, federated learning (FL) techniques have been proposed to enable decentralized model training via an orchestrating central server and have received increasing attention in several industries (including healthcare and finance). Despite its superior privacy protection property, adoption of FL is limited by a lack of systematic understanding of its underlying economics. In this paper, we take an analytical approach to answer two questions: (1) when do data owners prefer to form a FL partnership over building ML models by themselves and (2) how can different contractual mechanisms be used to promote repeated contributions to FL (the cooperative outcome that benefits all participants). We formulate an iterated prisoner’s dilemma (IPD) model that accounts for unique FL characteristics, including the specification of the payoff matrix and the involvement of a central server to sanction noncooperation. We find that partnership formation requires participants to be not too forward-looking in temporal preferences, which is contrary to the conventional wisdom in IPD. Furthermore, to promote repeated contributions, it is insufficient to only rely on penalties imposed by the central server or by participants for noncooperation, but a combination of both is enough. Our work advances theoretical understanding of the economics of FL and provides prescriptive insights that can inform FL participant selection and contract design. This paper was accepted by D. J. Wu, information systems. Funding: This work was partially supported by Cisco Research. Supplemental Material: The online appendices are available at https://doi.org/10.1287/mnsc.2023.00611 .