On FTC's 'Do Not Track'

Abstract:     
The Federal Trade Commission (FTC) has recently proposed a 'Do Not Track' mechanism in response to the fervent call for protecting consumer’s privacy online. We argue that restricting information collection is a misplaced focus in addressing Internet privacy, and develop a mechanism that helps alleviate consumer’s privacy concerns without sacrificing online firms’ business benefits from using customer information. Building on the proposed mechanism, we derive alternative regulatory tools that can be readily available to policy makers, and investigate their respective effectiveness in improving social welfare.

We demonstrate that by leaving consumers partial control on how their information is used, the firm can devise a contract that serves the entire market while effectively catering to the privacy needs of different consumers. Further, results from our policy analysis suggest that imposing a requirement on preserving a portion of customer information purely for generating personalization is a superior strategy to restricting the firm’s ability to collect personal information. Our modeling approach offers an alternative to the reliance on external instruments in traditional contract design, and extends the principal-agent framework to a three-tier interaction in a non-price context. Further, our work is one of the first that respond to the FTC’s initiatives to pursue legislative options in protecting consumer’s online privacy, and offers important guidelines to regulators for governing the information practice of online companies.

Number of Pages in PDF File: 60

Keywords: 'Do Not Track', mechanism design, policy analysis, privacy

JEL Classification: L52, O38, L14

working papers series