Transaction Costs, Privacy, and Trust: The Laudable Goals and Ultimate Failure of Notice and Choice to Respect Privacy Online

Abstract

The goal of this paper is to outline the laudable goals and ultimate failure of notice and choice to respect privacy online and suggest an alternative framework to manage and research privacy. This paper suggests that the online environment is not conducive to rely on explicit agreements to respect privacy. Current privacy concerns online are framed as a temporary market failure resolvable through two options: (a) ameliorating frictions within the current notice and choice governance structure or (b) focusing on brand name and reputation outside the current notice and choice mechanism. The shift from focusing on notice and choice governing simple market exchanges to credible contracting where identity, repeated transactions, and trust govern the information exchange rewards firms who build a reputation around respecting privacy expectations. Importantly for firms, the arguments herein shift the firm’s responsibility from adequate notice to identifying and managing the privacy norms and expectations within a specific context.

Keywords: Privacy, notice and choice, FIP, business ethics, public policy, privacy in practice, transaction cost economics, Coase