Privacy and Personal Data Collection with Information Externalities

Abstract

We provide a theoretical model of privacy in which data collection requires consumers' consent and consumers are fully aware of the consequences of such consent. Nonetheless, excessive collection of personal information arises in the monopoly market equilibrium which results in excessive loss of privacy compared to the social optimum. In a fragmented market with a continuum of firms, no individual website has incentives to collect and monetize users' personal data in the presence of scale economies in data analytics. However, the emergence of data brokerage industry can restore these incentives. Our results have important policy implications for the ongoing debate regarding online privacy protection: excessive loss of privacy emerges even with costless reading and perfect understanding of all privacy policies. We support the view that privacy is a public good and propose alternative policy remedies beyond the current informed-consent approach.

Keywords: privacy, personal data, information externalities, big data analytics

JEL Classification: D, H, L