This article – which can be found here – summarises theoretical and empirical research on the economics of privacy. It focuses on the economic value and consequences of protecting and disclosing personal information, and on consumers’ understanding and decisions regarding the trade-offs associated with the privacy and the sharing of personal data.
Their starting point is that the economics of privacy is a branch of information economics. Economists’ interest in privacy has primarily focused on its informational dimension: the trade-offs arising from protecting or sharing of personal data. At its core, the economics of privacy concerns the trade-offs associated with the balancing of public and private spheres between individuals, organizations, and governments. In this regard, the authors identify a number of important characteristics of privacy and personal information as economic goods:
- First, the value of keeping some personal information protected, and the value of it being known, are almost entirely context-dependent and contingent on essentially uncertain combinations of states of the world and on the preferences of individuals.
- Secondly, privacy trade-offs are also inherently intertemporal: disclosing data often carries an immediate benefit. The costs of doing so are often uncertain, and are generally incurred at a more distant point in time, since the data subject may not know what the data holder will do with their data or with what consequences.
- Third, privacy trade-offs often mix the tangible (e.g. the discount I will receive from the merchant) with the intangible (e.g. the psychological discomfort I experience when something very personal is exposed without my consent) and the nearly incommensurable (e.g. the effect of surveillance on society).
- Fourth, the value of privacy for individuals can be derived either from their preferences for privacy (i.e. privacy as final good) or from other advantages of keeping information private such as avoiding harm or discrimination (i.e. privacy as an intermediate good). Attitudes towards privacy mainly capture subjective preferences, i.e. people’s valuations of privacy as a good in itself – but those valuations are separate from the value of privacy as an intermediate good (for instance, regardless of whether an individual thinks “my life is an open book, I have nothing to hide,” that individual will still suffer tangible harm if she is a victim of identity theft).
- Fifth, it is not always obvious how to properly value privacy and personal data: should the reference point be the price one would accept to give away their data, or the amount they would pay to protect it? In the alternative, should the value be the expected cost the data subject may suffer if her data is exposed, or the expected profit the data holder can generate from acquiring her personal information?
If this seems like a list of problems with using privacy as an economic / competition law benchmark, that’s the reason why I discuss this here.
The paper then provides a review of the literature, which seems to focus on how these various characteristics of personal data and privacy modify standard economic models. The authors begin with a survey of the theoretical literature, which highlights how the economic analysis of privacy evolved over time (section 2). A key theme emerging from this literature is that there is no unequivocal impact of privacy protection (or sharing of information) on welfare. Depending on context and conditions, privacy can either increase or decrease individual as well as societal welfare. Section 3 then looks at the empirical literature on privacy trade-offs, and at what is known about consumers’ attitudes and behaviours towards privacy. They find that empirical evidence supports not only scenarios in which the protection of privacy slows innovation or decreases economic growth, but also scenarios in which the opposite is the case. Further, the literature reveals that consumers are unable to make informed decisions about their privacy, due to information asymmetries and the temporal dimension of privacy-related trade-offs. Finally, section 4 highlights current issues in the privacy debate that may be of interest to economists (namely, the role of regulation v. self-regulation and the trade-offs between big data and privacy).
The authors reach three overarching conclusions. First, devising a unified economic theory of privacy is hard, because privacy issues of economic relevance arise in widely diverse contexts. Second, the theoretical and empirical literature seem to indicate that the protection of privacy can both enhance and detract from individual and societal welfare depending on the situation. Thus, it is not possible to conclude unambiguously whether privacy protection entails a net “positive” or “negative” change in purely economic terms: its impact is context specific. Third, in digital economies, consumers’ ability to make informed decisions about their privacy is severely hindered because consumers are often in a position of imperfect or asymmetric information regarding when their data is collected, for what purposes, and with what consequences.
I would further highlight a conclusion that may be relevant to current debates: it is difficult to pinpoint reliably the valuations that consumers assign to their privacy or to their personal data. This may not absolutely prevent one from taking into account the impact of privacy / personal data rules in competitive assessments, but it does mean that it is extremely difficult to conceptualise “privacy” or “personal data” as a parameter of competition.