Balancing Costs And Benefits Of New Privacy Mandates

Abstract:     
Technological innovations that allow businesses unprecedented access to personal financial and medical records have prompted widespread calls for safeguards and increased security. In his working paper "Balancing the Costs and Benefits of New Privacy Mandates," Robert E. Litan, codirector of the AEI-Brookings Joint Center for Regulatory Studies, asserts that some safeguards may be necessary. But he cautions against over-regulation that could ultimately inconvenience consumers or inflate prices.

In particular, Litan urges Congress to pass a limited, but comprehensive, federal statute that would require companies - whether doing business on or off the Internet - to notify consumers how information collected about them will be used and to afford them an opportunity to "opt out" of having their data shared with other parties for marketing purposes. Litan favors an even stricter regime for medical information, which is especially sensitive, and should not in his view be shared with affiliates or outsiders without consumers' explicit consent.

Litan opposes, however, more far-reaching restrictions on the sharing of personal information, arguing that the costs would outweigh the benefits. A relatively unfettered flow of information allows investigators to root out fraud, increases competition that saves consumers money, and can result in people receiving product information tailored to their interests and financial status.

Litan concludes that a limited notice and opt-out requirement would be in the self-interest of business, which would enhance customer trust, and thus would produce benefits in excess of the small costs involved.

Note: The wrong version of this abstract was mistakenly published in a prior issue. The correct version is reprinted below.

Working Paper Series