Privacy Regulation and Innovation Policy

Abstract

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. Dire predictions about regulation’s impact on innovation are common in many arenas, but seem to hold particularly great policy sway with regard to information privacy regulation. Here, we seek to bring analytical clarity to the debate about information privacy regulation, by showing how the interplay between misaligned demand signals in personal information markets and failures of supplier appropriability jointly determine the market’s innovation portfolio.

Our analysis suggests that the characteristics of personal data do entangle some sorts of privacy regulation with appropriability in ways that can affect innovation incentives. Privacy regulation’s possible effects on innovation do not justify blanket opposition, however, because they depend on details of regulatory design. Moreover, some sorts of privacy regulation designed to address misaligned market demand signals can potentially mitigate failures of appropriability and provide a more socially beneficial portfolio of innovation incentives. 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.

Keywords: privacy, innovation, regulation, competition, platform

JEL Classification: K2