The Economics of Privacy

Abstract

This chapter reviews economic analyses of privacy. We begin by scrutinizing the “free market” critique of privacy regulation. Welfare may be non-monotone in the quantity of information, hence there may be excessive incentive to collect information. This result applies to both non-productive and productive information. Over-investment is exacerbated to the extent that personal information is exploited across markets. Further, the “free market” critique does not apply to overt and covert collection of information that directly causes harm. We then review research on property rights and challenges in determining their optimal allocation. We conclude with insights from recent empirical research and directions for future research.