The Economic Value of Personal Data: An Introduction
5 Pages Posted: 13 Nov 2015
Date Written: October 2015
Three concepts related to information are often confused: the cost of production, the quantity and the value of information. If cost is generally proportional to the amount of information exchanged, there is seldom a direct link between the amount of information and its value. Consider two examples of smart, connected products involving highly sensitive personal data: home automation data and health data. Nest (acquired by Google in January 2014 for $ 3.2 billion) manufactures smart thermostats to control temperature in the different rooms of a home based on environmental parameters such as the number of people in each room. Withings started by selling smart scales but now also sells activity trackers, blood pressure indicators, smart watches, sleep monitors and surveillance cameras. These are information services that produce information through sensors and transmit them via the Internet of Things. The cost of installing these sensors is not very high. The amount of information to be communicated and stored on servers costs more. But none of these quantities is directly related to the value of information. Indeed, a single bit of information indicating with certainty that a fire is about to break out in your home while you are away has a much greater value than the gigabytes of data corresponding to daily variations in the number of people in every part of your home during years. Similarly, a single bit of information indicating with certainty that you are suffering from a rare disease has much more value than the hundreds of gigabytes corresponding to the measurements of your heart rate or the number of your daily steps over several years.
The theory of information in economics experienced a sporadic development in the past five decades since the pioneering work of Jacob Marschak. The difficulty arises from to the early attempts to analyze information as a homogeneous good with a single market value. It is now clear that information is a differentiated economic good. In this short note, I review several important concepts: information as an economic good, information theory in economics and the willingness to pay for information, the market for personal information as an equilibrium between supply and demand for personal information.
Keywords: Personal information, economic value, Internet economics, information theory
JEL Classification: D80, L86
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