Violating Your Privacy: An Economist's Perspective
12 Pages Posted: 1 Apr 2013 Last revised: 26 Sep 2013
Date Written: March 30, 2013
Concerns about privacy are growing. A right to privacy is in part a constitutional right. However, there are also important economic implications to the fair redress and enforcement of that right. Admittedly, not everything of value can be measured in dollars and cents and courts have found that monetary compensation is not sufficient for violations of constitutional rights, such as free speech. Nevertheless, a better understanding of the economic values associated with privacy, and its violation, can inform the current policy debate in at least two ways. Narrowly, violations of privacy that cause direct economic harm may need to be compensated. Broadly, a better understanding of the economic market failures associated with privacy can help inform policies that attempt to create the right economic price signals to guide private decision making when it concerns privacy.
The economic harms to individuals who have their privacy violated fall into at least two categories. First, some violations of privacy lead to direct economic harms. This is the type of harm, for example, that occurs from identify theft — someone gains access to your private information and that allows them to create liabilities in your name. Second, while not always economic costs, some privacy violations create value that is not shared with the individuals whose information creates the value. This is the so-called Big Data phenomenon where aggregations of data are more valuable than their component parts. The economic flows associated with this type of transaction can be further complicated when the data are collected from use of a ‘free’ product. The first part of this analysis will review literature and characterize issues with estimating both of these types of value. For example, the Big Data problem has many characteristics similar to allocation of common costs or apportioning joint value creation as well as issues related to two-sided markets — topics economists have studied extensively.
The broader economic issues reach beyond the value of data about individuals to those individuals and concern the externalities of costs and benefits to others. Better understanding these externalities is urgent as institutions around privacy are developed and policy is codified in legislation. These costs and benefits can be divided between those that directly impact other economic actors (e.g., firms, data aggregators and researchers) and those that concern society as a whole (e.g., so-called social benefits of Big Data or protection of constitutional rights.) The first type of externality would be the type imposed on a company that possesses protected data from individuals. While this data might be necessary for a firm to provide appropriate services to their customers, the firm incurs costs to protecting the data. Significantly burdensome protection requirements would impose substantial negative externalities on the firm protecting the data, possibly leading to under provision of the firm’s goods or services. The second type of externality concerns the potential for research and analysis for the greater good, as many proponents of Big Data would argue. This is essentially a positive social externality. In the face of such social externalities, economic inefficiencies arise, suggesting the potential for some policy intervention. Understanding underlying economic consequences of protecting, or violating, privacy can help guide policies that enable the correct price signals for private actors to inform the proper level of privacy protection. (Of course, punitive damages for violations of fundamental rights are also intended to incentivize behavior, although with possibly blunter signals.)
In addition to characterizing and organizing the different types of economic flows associated with various dimensions of privacy, this paper will provide illustrative examples of estimating select economic values.
Keywords: Privacy, market failures
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