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    The Economics of Privacy
    The Economics of Privacy
    The Economics of Privacy
    Ebook327 pages4 hours

    The Economics of Privacy

    By Avi Goldfarb

    ()

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    About this ebook

    A foundational new collection examining the mechanics of privacy in the digital age.

    The falling costs of collecting, storing, and processing data have allowed firms and governments to improve their products and services, but have also created databases with detailed individual-level data that raise privacy concerns. This volume summarizes the research on the economics of privacy and identifies open questions on the value of privacy, the roles of property rights and markets for privacy and data, the relationship between privacy and inequality, and the political economy of privacy regulation.

    Several themes emerge across the chapters. One is that it may not be possible to solve privacy concerns by creating a market for the right to privacy, even if property rights are well-defined and transaction costs are low. Another is that it is difficult to measure and value the benefits of privacy, particularly when individuals have an intrinsic preference for privacy. Most previous attempts at valuation have focused only on quantifiable economic outcomes, such as innovation. Finally, defining privacy through an economic lens is challenging. The broader academic and legal literature includes many distinct definitions of privacy, and different definitions may be appropriate in different contexts. The chapters explore a variety of frameworks for examining these questions and provide a range of new perspectives on the role of economics research in understanding the benefits and costs of privacy and of data flows. As the digital economy continues to expand the scope of economic theory and research, The Economics of Privacy provides the most comprehensive survey to date of this field and its next steps.

    LanguageEnglish
    PublisherUniversity of Chicago Press
    Release dateAug 13, 2024
    ISBN9780226834085
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      Book preview

      The Economics of Privacy - Avi Goldfarb

      National Bureau of Economic Research Conference Report

      The Economics of Privacy

      Edited by

      Avi Goldfarb and Catherine E. Tucker

      The University of Chicago Press

      Chicago and London

      The University of Chicago Press, Chicago 60637

      The University of Chicago Press, Ltd., London

      © 2024 by National Bureau of Economic Research

      All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission, except in the case of brief quotations in critical articles and reviews. For more information, contact the University of Chicago Press, 1427 E. 60th St., Chicago, IL 60637.

      Published 2024

      Printed in the United States of America

      33 32 31 30 29 28 27 26 25 24        1 2 3 4 5

      ISBN-13: 978-0-226-83407-8 (cloth)

      ISBN-13: 978-0-226-83408-5 (e-book)

      DOI: https://doi.org/10.7208/chicago/9780226834085.001.0001

      Library of Congress Cataloging-in-Publication Data

      Names: Goldfarb, Avi, editor. | Tucker, Catherine (Catherine Elizabeth), editor.

      Title: The economics of privacy / edited by Avi Goldfarb and Catherine E. Tucker.

      Other titles: National Bureau of Economic Research conference report.

      Description: Chicago : The University of Chicago Press, 2024. | Series: National Bureau of Economic Research conference report | Includes bibliographical references and index.

      Identifiers: LCCN 2023055007 | ISBN 9780226834078 (cloth) | ISBN 9780226834085 (ebook)

      Subjects: LCSH: Privacy, Right of—Economic aspects. | Privacy, Right of—Economic aspects—United States. | Data protection—Law and legislation. | European Parliament. General Data Protection Regulation.

      Classification: LCC K3264.C65 E36 2024 | DDC 322.44/8—dc23/eng/20231207

      LC record available at https://lccn.loc.gov/2023055007

      This paper meets the requirements of ANSI/NISO Z39.48-1992

      (Permanence of Paper).

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      Contents

      Acknowledgments

      Introduction

      Avi Goldfarb and Catherine E. Tucker

      1. The Economics of Privacy: An Agenda

      Catherine E. Tucker

      2. The Economics of Privacy at a Crossroads

      Alessandro Acquisti

      3. The Platform Dimension of Digital Privacy

      Alessandro Bonatti

      4. Economic Research on Privacy Regulation: Lessons from the GDPR and Beyond

      Garrett A. Johnson

      5. Privacy of Digital Health Information

      Amalia R. Miller

      Notes

      Author Index

      Subject Index

      Acknowledgments

      This volume was made possible by a generous grant from the Alfred P. Sloan Foundation (grant #G-2020-12662) to the National Bureau of Economic Research. It is part of a multi-year research initiative at the NBER on the economics of digitization. We are grateful to Daniel Goroff of the Sloan Foundation for his interest in and support for this project. We would also like to thank Helena Fitz-Patrick for outstanding assistance in the editorial process, Denis Healy for expert management of the Sloan Foundation grant, and Rob Shannon for excellent administration of the meeting at which the papers in this volume were presented.

      Introduction

      Avi Goldfarb and Catherine E. Tucker

      Digital economics focuses on how the economy is transformed when information can be stored in bits and not atoms. This advance has reduced the cost of collecting, storing, and processing data. Firms and governments can observe individual-level behavior at a detailed level and use this information to provide better products and services; however, the ability to access this information raises privacy concerns.

      This volume provides a summary of the research to date on the economics of privacy and identifies a number of open questions. The five chapters in this volume are based on presentations that the authors gave to the NBER PhD tutorial on the Economics of Privacy, held in October 2022. They provide different perspectives on the role of economists and economics research in understanding the benefits of privacy and the benefits of data flows.

      Several common themes emerge across the chapters.

      One common theme is the challenge in applying the Coase theorem to privacy. To many economists, it is compelling to assume that privacy concerns can be solved by the market because the parties should be able to negotiate a price for exchange of data if property rights are well defined and transaction costs are low. Each chapter describes situations where the Coase theorem breaks down.

      A second common theme relates to measurement. It is relatively easy to measure the costs of privacy in terms of innovation or competition and so much of the existing literature has documented such costs. It is more difficult to measure the benefits of privacy, particularly when those benefits are about intrinsic preferences rather than a direct and measurable market harm.

      A third common theme is the difficulty in defining privacy through an economics lens. The broader academic and legal literature includes many distinct definitions of privacy. With our emphasis on formal models, economists must select a definition and formalize it. This creates challenges in the literature as people use the same word, privacy, to mean different things.

      We next briefly describe each chapter in turn.

      In Chapter 1, Catherine Tucker focuses on identifying the open research questions, linking the economics perspective to changes in other fields. The chapter defines privacy using the definition from Warren and Brandeis (1890) as The right to be let alone. The chapter comprehensively lists a set of outstanding questions and discusses the role of the economist’s perspective for addressing these questions. Key open questions include the value of privacy, the role of property rights and data markets, the relationship between privacy and inequality, and the political economy of privacy.

      Alessandro Acquisti takes a different approach in Chapter 2, arguing that the typical economic approach is flawed in the context of privacy. While the chapter’s core point matches a point made by Tucker—that we need more research on the benefits of privacy—Acquisti argues that the economic approach is limited because it focuses on what we can measure and what markets can solve. The chapter defines privacy using Altman’s (1976) definition as a dynamic and dialective process through which individuals contextually manage the boundaries between the self and others. Ultimately, the chapter concludes that economists would benefit more from reading the privacy literature outside of economics and provides a brief summary of key ideas in that literature.

      In Chapter 3, Alessandro Bonatti provides a formal approach to understanding how privacy, defined as a restriction on data flows, affects market outcomes. The chapter begins by providing a comprehensive theoretical framework for understanding privacy. Then the chapter explains how the broader economics literature on privacy can be interpreted using this model. A key idea emerging in this literature, and central to the chapter, is the role of data externalities. The provision of data by one person can affect others. One aspect of this is the social dimension of data, as data about other people can be informative about one’s own behavior. Like Tucker in Chapter 1, this chapter identifies open questions related to markets for privacy and to political economy.

      Garrett Johnson’s chapter provides a detailed analysis of a particular regulation: the European Union’s General Data Protection Regulation (or GDPR). The chapter provides a detailed description of what is likely the most important digital privacy regulation to date. In the process, it highlights several ongoing challenges in empirical privacy research. Regulation has benefits and costs, and because costs are more straightforward to measure in terms of reduced competition and reduced innovation. The chapter highlights how the regulation as written can be different from the regulation as implemented. This distinction between the law and its enforcement can lead to a misinterpretation of the effects of privacy regulation on behavior and on market outcomes. Overall, the chapter provides a useful framework for economists looking to examine how changes in privacy policies by firms or governments might affect economic outcomes.

      Fifth, and finally, Amalia Miller describes the role of privacy in healthcare. She notes that health is a particularly interesting area to study privacy because there are extraordinary benefits of data flows and an extraordinary potential for harm. The benefits are clear as improved healthcare means longer and healthier lives. Better information about individual patients could lead to improved care. Better aggregated health information could lead to better diagnostics and treatments. The chapter also lists a variety of harms. Direct harms include a feeling of shame or embarrassment, a feeling of betrayal, and a feeling of invasion or loss of freedom. Indirect market harms include labor market harms, insurance, personalized pricing (if higher), and targeted advertising (if manipulative, annoying, or intrusive). Indirect nonmarket harms include social stigma, harms to reputation, increased risk of identity theft or fraud, and increased legal risk. While the chapter emphasizes these harms in the context of health information, the division into direct harms, indirect market harms, and indirect nonmarket harms provides a useful framework for the broader economics of privacy literature. This perspective is grounded in economic models of the costs and benefits of data flows, and the potential for externalities to undermine standard economic approaches. The chapter also notes that there is a great deal of health privacy regulation in place in the US and around the world, making health a fruitful area for empirical work. The conclusion of Chapter 5 summarizes the challenges for decision-making around privacy, highlighting the fundamental trade-offs between preserving privacy and harnessing the value of IT and data-driven innovation.

      This volume aims to summarize the key open questions in the economics of privacy as of 2023. In doing so, the chapters provide different frameworks that economists can use to undertake research on privacy.

      1

      The Economics of Privacy

      An Agenda

      Catherine E. Tucker

      1.1 The Challenge of Privacy for Economics

      The economics of privacy is a challenging field in which to be an economist. There are two reasons for this.

      The first challenge stems from the definition of privacy. What is privacy? My favorite definition is freedom from unwarranted intrusion. This definition stems from Warren and Brandeis (1890), who defined privacy as the right to be left alone. They were famously inspired to write their influential essay by the rise of gossip columnists capturing photos with the new technology of portable cameras. This is important, as I will argue in this essay that our conceptions of privacy, and therefore what is important to study as economists, are inextricably tied up with progress in technology. Concepts of privacy are constantly challenged by new technologies that parse personal information in new and unexpected ways. Therefore, unlike a field such as labor economics where the definition of what labor supply is is relatively unchanging, our ideas of what privacy is and should be are in constant flux.

      The second challenge stems from our need as economists to at essence conceptualize any question in economics through the lens of a utility function. Farrell (2012) describes the issue very usefully. Typically, in the theoretical literature in economics we tend to think about intermediate preferences for privacy—these reflect the anticipation that if we share our data with a firm, it can be used potentially for things that harm us, like price discrimination. By contrast, the vast majority of the literature outside of economics thinks about privacy as a right or something where people should just have a fixed intrinsic taste for keeping certain types of information privacy. Indeed, often the descriptions of tastes for privacy outside of economics suggest a distaste for creepiness (Richards and Hartzog 2015), or a taste for data being only used in the same context (Nissenbaum 2004). While of course a taste for anything can be included in a utility function, it is unsatisfactory for a discipline that has tried to always model utility functions based on first principles.

      1.2 The Focus of the Economics of Privacy Literature So Far

      When trying to write an essay on the economics of privacy, it is important to highlight that this has already been done stupendously well by Professor Alessandro Acquisti of Carnegie Mellon University and co-authors, culminating in an essay published in the Journal of Economic Literature (Acquisti, Taylor, and Wagman 2016). What is attractive about this conception of the history of privacy is that they define a variety of decades of schools of thought and how this has progressed over time.

      The first wave identified by Acquisti et al. (2016) is that of the Chicago School in the 1970s, led by theorists such as Stigler and Posner. In this literature, privacy was defined as a propensity toward secrecy—and in a world where information is generally beneficial to welfare, these models evaluated how tastes for privacy itself could lead to harm to welfare (Posner 1978, 1981; Stigler 1980). Of course, the wave of information economics that characterized theory in the 1980s in economics, itself questioned the idea that more information is always beneficial initiated by some of the idea in theories of signaling and information cascades (Spence 1973; Hirshleifer 1971).

      The second wave identified by Acquisti et al. (2016) is also a theoretical literature but this time led by information economists who were interested in questions of technology. Varian (2002) shifted the question of privacy from being one of simply secrecy in what information is shared with other people, to being one firmly about data. This led to new questions such as what should be secondary use rights associated with data. As such it gave rise to what Acquisti et al. (2016) describe as the third wave of theoretical literature, which is interested in questions such as price discrimination (through the use of cookies) (Acquisti and Varian 2005) and targeting effects in online advertising (Johnson 2013; Bergemann and Bonatti 2011, 2015).

      The other large shift in the last decade of research has been a proliferation of empirical work in privacy. As described by Goldfarb and Tucker (2012a), much of this work has tried to quantify the effects of privacy regulation on the economy, with much of the literature asking questions about advertising markets (Goldfarb and Tucker 2011; Chiou and Tucker 2012; Johnson, Shriver, and Du 2020; Jia, Jin, and Wagman 2018; Peukert et al. 2020; Johnson, Shriver, and Goldberg 2022; Godinho de Matos and Adjerid 2022), though some of the literature also asks about online behavior (Zhao et al. 2021), financial markets (Kim and Wagman 2015), and health markets (Miller and Tucker 2009, 2011; Adjerid et al. 2016; Miller and Tucker 2017).

      These few brief paragraphs do not of course do justice to the literature on the economics of privacy. However, it is fair to say that as yet the number of researchers and number of publications are relatively small given its potential importance in the digital economy. Recently recognizing this, the NBER, and with support from the Sloan Foundation, has instituted a one-off conference on the economics of privacy and also a PhD tutorial to try and inspire more work in this area. This chapter of the handbook that reflects this work tries to offer some suggestions about how economists might be able to deepen and broaden this current literature.

      1.3 Outstanding Questions

      This handbook is aimed at young researchers who are starting off their careers. Therefore, it makes sense to focus on some of the big questions that researchers in economics have not yet tackled (or have only tackled in part).

      1.3.1 The Value of Privacy

      1.3.1.1 Measuring Positive Consequences of Privacy Regulation

      Much of the empirical wave of research on privacy has focused on the question of how privacy regulation hurts economic outcomes—by restricting advertising effectiveness (Goldfarb and Tucker 2011; Johnson, Shriver, and Du 2020), leading to market concentration (Peukert et al. 2020; Johnson, Shriver, and Goldberg 2022), exacerbating inequality (Kim and Wagman 2015), or hurting health outcomes (Miller and Tucker 2009; Adjerid et al. 2016; Miller and Tucker 2017). However, given the large literature on how privacy regulation has large negative economic consequences, the paucity of literature on the benefits of privacy regulation is surprising.

      Therefore, it may make sense for researchers to also think about situations or contexts where privacy rights and regulations might have clear positive consequences for individuals. Some I have thought of include:

      • Data concerning reproductive health

      • Data concerning mental illness

      • Data concerning disability that might be used to disqualify potential employees from jobs they could do well

      • Data concerning past crimes that are orthogonal to a current question that requires judgment

      One thing which all these things have in common is that they concern questions where a stigma exists that is unrelated to potential economic output or the economic quality of a match. In such cases, if privacy regulation tempers data diffusion about something that has an irrational stigma, then it must be the case that privacy regulation benefits individuals. If this is the case, privacy regulation or privacy protections should have positive effects on consumer welfare.

      Other occasions where it should be straightforward to document benefits from privacy regulation include instances where data itself might be used for coercion: This might include:

      • Targeting those who suffer from addictive behavior to pursue their addiction

      • Targeting those who have struggled managing their credit in the past, with further unwise credit offerings

      • Targeting those who suffer eating disorders, with weight loss products

      These examples share the theme that if

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