The Dynamic Effect of Information Privacy Law

Abstract

Discussions of information privacy typically rely on the idea that there is a tradeoff between privacy and availability of information. But privacy, under some circumstances, leads to the creation of more information. In this article, I identify such circumstances by exploring the ex-ante incentives created by entitlements to personal data and evaluating the long-term effects of privacy. In so doing, I introduce an economic justification of information privacy law.

Under the standard law & economics account, as long as property rights are defined and transaction costs are low, initial right allocations should be irrelevant for social welfare. But initial allocations matter when either of these two conditions is absent. Allocations also matter for the production of goods that do not yet exist. Personal information has these characteristics. While the costs of disseminating information are low, transaction costs to transfer an entitlement over it are not. In addition, availability of information requires disclosure—and thereby imposes costs. This analysis challenges the traditional economic objection to information privacy and provides a new justification for privacy rules by casting them as entitlements over personal information.

The approach I develop here provides a framework to identify which types of information ought to be protected and how privacy law should protect them. To do so, it analyzes the placement and optimal protection of personal information entitlements while also examining the commonalities between information privacy and intellectual property. At a more abstract level, it sheds light on the desirability of a sectoral versus an omnibus information privacy law.