The Law and Economics of Consumer Privacy Versus Data Mining

Abstract:     
The collection, storage, processing, recombination, and (re)sale of consumers' data has grown tremendously. Consumer data is now usually maintained in on-line databases and collected without remuneration towards or even the informed consent of consumers. The mining of such consumer data raises a host of legal and economic issues. This paper considers the tradeoff between allocative efficiency from matching direct mail advertising with demographic niches versus consumer privacy; potential misuse or abuse of data mining, ranging from outright criminal theft to inaccurate or outdated records; piggy-backing of law enforcement agencies on privately created data mines; whether default rules about data mining effectively become mandatory; and finally, who does and should own such data as consumers' names, addresses, phone numbers and purchase histories. Traditional consumer protection law deals with such problems of fraudulent business practices as deceptive advertising and misrepresentation in product warranties. Such laws have the economics of information as their common intellectual basis. This paper applies psychological games and behavioral economics to investigate distinct justifications for and types of regulation of data mining. This paper also considers personhood and commodification perspectives critical of applying economic analysis to study legal rules and institutions, in particular, treating consumers' data as private property.

Working Paper Series