The Economics of Privacy

TLDR

The article reviews and connects diverse theoretical and empirical research on the economics of privacy. It examines the economic value and consequences of protecting versus disclosing personal information and how consumers understand and decide on privacy trade‑offs. The authors identify three key themes: a single unifying economic theory of privacy is elusive; privacy protection can both enhance and reduce welfare; and consumers face information asymmetries that impede informed privacy decisions in digital economies. JEL codes: D82, D83, G20, I10, L13, M31, M37.

Abstract

This article summarizes and draws connections among diverse streams of theoretical and empirical research on the economics of privacy. We focus 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. We highlight how the economic analysis of privacy evolved over time, as advancements in information technology raised increasingly nuanced and complex issues. We find and highlight three themes that connect diverse insights from the literature. First, characterizing a single unifying economic theory of privacy is hard, because privacy issues of economic relevance arise in widely diverse contexts. Second, there are theoretical and empirical situations where the protection of privacy can both enhance and detract from individual and societal welfare. 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. We conclude the article by highlighting some of the ongoing issues in the privacy debate of interest to economists. (JEL D82, D83, G20, I10, L13, M31, M37)