The Economics of Privacy †

Journal of Economic Literature 2016, 54(2), 442–492 http://dx.doi.org/10.1257/jel.54.2.442 The Economics of Privacy † Alessandro Acquisti, Curtis Taylor, and Liad Wagman* This article summarizes and draws connections among diverse streams of theoretical and empirical research on the economics of privacy. We focus on the economic value and consequences of protecting and disclosing personal information, and on consumers’ understanding and decisions regarding the trade-offs associated with the privacy and the sharing of personal data. We highlight how the economic analysis of privacy evolved over time, as advancements in information technology raised increasingly nuanced and complex issues. We find and highlight three themes that connect diverse insights from the literature. First, characterizing a single unifying economic theory of privacy is hard, because privacy issues of economic relevance arise in widely diverse contexts. Second, there are theoretical and empirical situations where the protection of privacy can both enhance and detract from individual and societal welfare. Third, in digital economies, consumers’ ability to make informed decisions about their privacy is severely hindered because consumers are often in a position of imperfect or asymmetric information regarding when their data is collected, for what purposes, and with what consequences. We conclude the article by highlighting some of the ongoing issues in the privacy debate of interest to economists. ( JEL D82, D83, G20, I10, L13, M31, M37) 1. Why an Economics of Privacy Friedrich Hayek’s 1945 treatise on the use of knowledge in society. Contributions to what he value and regulation of information has become known as the field of informa- Tassets have been among the most inter- tion economics have been among the most esting areas of economic research since influential, insightful, and intriguing in the * Acquisti: Heinz College, Carnegie Mellon Univer- Hal Varian, and Frederik Zuiderveen Borgesius. Acquisti sity. Taylor: Department of Economics, Duke University. gratefully acknowledges support from the Alfred P. Sloan Wagman: Stuart School of Business, Illinois Institute of Foundation and the Carnegie Corporation of New York Technology. We are grateful for useful comments and sug- via an Andrew Carnegie Fellowship. Taylor’s research was gestions provided by the reviewing team, as well as by Omri supported in part by NSF grant SES-1132187. Wagman Ben-Shahar, Rainer Boheme, Alessandro Bonatti, Ryan gratefully acknowledges support from the Yahoo Fac- Calo, James Cooper, Avi Goldfarb, Jens Grossklags, Chris ulty Research and Engagement Program. The statements Hoofnagle, Kai-Lung Hui, Nicola Jentzsch, Jin-Hyuk Kim, made and views expressed in this manuscript are solely the Brad Malin, Helen Nissenbaum, Andrew Odlyzko, Randal responsibility of the authors. All errors are the authors’ own. Picker, Ivan Png, Soren Preibusch, Giancarlo Spagnolo, † Go to http://dx.doi.org/10.1257/jel.54.2.442 to visit the Lior Strahilevitz, Catherine Tucker, Tommaso Valletti, article page and view author disclosure statement(s). 442 Acquisti et al.: The Economics of Privacy 443 profession. Seminal studies have investi- economics therefore relate to the topic gated the informative role of prices in mar- of this article, because they pertain to the ket economies (Stigler 1961); the creation trade-offs arising from the public or private of knowledge and the incentives to innovate status of information. For instance, an auc- (Arrow 1962); the prevalence of asymmetric tion may be structured in such a way that its information and adverse selection (Akerlof participants will reveal their true costs or val- 1970); the transmission of private infor- uations, or a tax mechanism may be designed mation through signaling activity (Spence so that the agents will truthfully reveal their 1973); and voluntary disclosures (Grossman types. However, whereas research on auc- 1981; Milgrom 1981). It may be proper, tions and optimal taxation may pertain to however, to think of information economics the private information of abstract economic not as a single field, but as an amalgam of agents (which could be consumers, firms, many related subfields. One such subfield or other entities), the field of privacy eco- now receiving growing attention by econo- nomics, which is our focus, pertains more mists is the subject of this article: the study specifically to personal information of actual of privacy. individuals. As a consequence, of course, the Privacy is difficult to define. It means dif- field is often influenced by research in the ferent things to different people. It has been other branches of information economics. described as the protection of someone’s This article reviews the theoretical and personal space and their right to be left alone empirical economic literature investigating (Warren and Brandeis 1890); the control individual and societal trade-offs associated over and safeguarding of personal informa- with sharing and protecting personal data. In tion (Westin 1967); and an aspect of dignity, particular, it focuses on the flow and use of autonomy, and ultimately human freedom information about individuals by firms. In so (Schoeman 1992). While seemingly differ- doing, the article identifies a number of key ent, these definitions are related, because themes. One theme is that characterizing a they pertain to the boundaries between the single unifying economic theory of privacy self and the others, between private and is hard, because privacy issues of economic shared, or, in fact, public (Altman 1975). relevance arise in widely diverse contexts. As individuals and as consumers, we con- Nevertheless, we are able, within a given con- stantly navigate those boundaries, and the text, to identify a number of robust theoret- decisions we make about them determine ical insights emerging from the literature. A tangible and intangible benefits and costs, for second key theme is that both economic the- ourselves and for society. Thus, at its core, the ory and empirical analysis of privacy expose economics of privacy concerns the trade-offs varying scenarios. In some, privacy protec- associated with the balancing of public and tion can decrease individual and societal wel- private spheres between individuals, orga- fare; in others, privacy protection enhances nizations, and governments. Economists’ them. Thus, it is not possible to conclude interest in privacy has primarily focused on its informational dimension: the trade-offs arising from protecting or sharing of per- more entities (for instance, an email provider monitoring 1 a user’s messages). Other issues arise when that informa- sonal data. Other subfields of information tion is or is made public, and thus possibly accessible by a multitude of entities (for instance, a member of a social networking site publicly sharing personal information on 1 Some of the economic issues we consider in this article her profile). In this article, we will sometimes use the term arise when personal information is or becomes no longer “public” to refer to both types of scenarios—that is, to private because it is shared with, or accessed by, one or information that is no longer private. 444 Journal of Economic Literature, Vol. LIV (June 2016) unambiguously whether privacy protection evolved from an architecture of decentral- entails a net “positive” or “negative” change ized and possibly anonymous interactions in purely economic terms: its impact is con- (Berners-Lee 2000), to one where pack- text specific. A third key theme relates to ets of data capturing all types of behaviors the observation that consumers are rarely (if (from reading to searching, from relaxing to ever) completely aware about privacy threats communicating) are uniquely (Bendrath and and the consequences of sharing and pro- Mueller 2011) and sometimes personally tecting their personal information. Hence, (Xie, Yu, and Abadi 2009) identified. In this market interactions involving personal data environment, a few “gatekeeper” firms are in often take place in the absence of individ- a position to control the tracking and linking uals’ fully informed consent. Furthermore, of those behaviors across platforms, online specific heuristics may profoundly influence services, and sites—for billions of users. As a consumers’ privacy decision making. result, chronicles of peoples’ actions, desires, interests, and mere intentions are collected 1.1 The Value of Personal Data and the by third parties, often without individuals’ Value of Privacy knowledge or explicit consent, with a scope, Economists’ interest in informational pri- breadth, and detail that are arguably without vacy, generally intended as the control or precedent in human history. protection of personal information, can be Such vast amounts of collected data have readily understood: the protection and dis- obvious and substantial economic value. closure of personal data are likely to generate Individuals’ traits and attributes (such as a trade-offs with tangible economic dimen- person’s age, address, gender, income, pref- sions. The transition of modern economies erences, and reservation prices, but also her toward production of knowledge and recent clickthroughs, comments posted online, radical advancements in information tech- photos uploaded to social media, and so nology (in particular, the rise of the Internet) forth) are increasingly regarded as business have vastly enlarged the amount of individ- assets that can be used to target services

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