Gaining Trust Through Online Privacy Protection: Self-Regulation, Mandatory Standards, or Caveat Emptor

34 Pages Posted: 9 Jun 2004 Last revised: 7 Mar 2015

See all articles by Zhulei Tang

Zhulei Tang

Purdue University - Krannert School of Management

Yu Jeffrey Hu

Georgia Institute of Technology - Scheller College of Business

Michael D. Smith

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Date Written: September 1, 2007

Abstract

Trust is particularly important in online markets to facilitate the transfer of sensitive consumer information to online retailers. In electronic markets, various proposals have been made to facilitate these information transfers. We develop analytic models of hidden information to analyze the effectiveness of these regimes to build trust and their efficiency in terms of social welfare.

We find that firms' ability to influence consumer beliefs about trust depends on whether firms can send unambiguous signals to consumers regarding their intention of protecting privacy. Ambiguous signals can lead to a breakdown of consumer trust, while the clarity and credibility of the signal under industry self-regulation can lead to enhanced trust and improved social welfare. Our results also indicate that although overarching government regulations can enhance consumer trust, regulation may not be socially optimal in all environments because of lower profit margins for firms and higher prices for consumers.

Keywords: Privacy, asymmetric information, Internet, consumer surplus, producer surplus, social welfare

JEL Classification: D69, D82, L86

Suggested Citation

Tang, Zhulei and Hu, Yu Jeffrey and Smith, Michael D., Gaining Trust Through Online Privacy Protection: Self-Regulation, Mandatory Standards, or Caveat Emptor (September 1, 2007). Available at SSRN: https://ssrn.com/abstract=555878 or http://dx.doi.org/10.2139/ssrn.555878

Zhulei Tang (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Yu Jeffrey Hu

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Michael D. Smith

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

HOME PAGE: http://www.heinz.cmu.edu/~mds

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