Screening Incentives and Privacy Protection in Financial Markets: A Theoretical and Empirical Analysis

39 Pages Posted: 31 Aug 2013 Last revised: 19 Mar 2015

Jin-Hyuk Kim

University of Colorado at Boulder

Liad Wagman

Illinois Institute of Technology - Stuart School of Business, IIT

Date Written: August 29, 2013

Abstract

We study a model in which firms offer financial products to individuals, post prices for their products, and screen consumers who apply to purchase them. Any information obtained in the screening process may be traded to another firm selling related products. We show that firms’ ability to sell consumer information can lead to lower prices, higher screening intensities, and increased social welfare. By exploiting variations in the adoption of local financial-privacy ordinances in five California Bay Area counties, we are able to provide simple estimates of the effects of stricter financial-privacy laws on mortgage denial rates during 2001–2006. Consistent with the model’s predictions, denial rates for both home-purchase loans and refinancing loans decreased in counties where opt-in privacy ordinances were adopted. Moreover, estimated foreclosure start rates during the financial crisis of 2007–2008 were higher in counties where the privacy ordinance was adopted.

Keywords: consumer privacy, financial information, information trade, screening

JEL Classification: D18, G14, G21

Suggested Citation

Kim, Jin-Hyuk and Wagman, Liad, Screening Incentives and Privacy Protection in Financial Markets: A Theoretical and Empirical Analysis (August 29, 2013). Available at SSRN: https://ssrn.com/abstract=2317942 or http://dx.doi.org/10.2139/ssrn.2317942

Jin-Hyuk Kim

University of Colorado at Boulder ( email )

Campus Box 256
Boulder, CO 80309
United States

Liad Wagman (Contact Author)

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

565 W Adams St Suite 452
Chicago, IL 60661
United States
7739809883 (Phone)

HOME PAGE: http://lwagman.org

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