Better Together: Privacy Regulation and Innovation Policy
69 Pages Posted: 18 Nov 2018
Date Written: October 26, 2018
Industry players and opponents of privacy regulation claim broadly that privacy regulation will “stifle” innovation. This Article responds by bringing together traditional theories of regulation and innovation policy and applying them in the context of markets involving personal information.
Our analysis makes two significant contributions to the debate about privacy regulation and innovation. First, we distinguish between misaligned market demand signals and failures of appropriability. Regulation traditionally responds to misaligned market demand signals such as information asymmetries, externalities, and transaction costs, by attempting to realign perceived demand with a more socially desirable demand portfolio. Intellectual property law and innovation policy seek to address a different set of market failures, failures of appropriability, which are due, for example, to free rider problems. These mechanisms, though analytically distinct, work in parallel and in combination to determine the extent to which the market’s portfolio of innovative activity is socially sub-optimal. Nonetheless, the regulatory literature, including the literature on regulation and innovation, has paid little attention to failures of appropriability. Here, we bring together regulatory responses to misaligned market demand signals and failures of appropriability to show that concerns about regulation’s potentially innovation-stifling effects are often exaggerated and must be tested against the combination of the two.
Second, we consider whether blanket opposition to regulation or heightened concern about its implications for innovation is uniquely justified in the context of information privacy. Our analysis suggests that even though personal information is tied to failures of appropriability and thus carries implications of privacy regulation for innovation, this relationship cannot justify blanket opposition to privacy regulation. Furthermore, in some cases, privacy regulation designed to address misaligned market demand signals might even have the side effect of mitigating failures of appropriability that are especially likely to affect the market for personal-information-based innovation. Proposals for information privacy regulations should thus be judged on their individual merits, taking both misaligned market demand signals and failures of appropriability into account.
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