The Economics and Behavioral Economics of Privacy

What is it about?

Imagine a world in which consumers’ preferences can be so precisely estimated by observing their online behavior that firms are able to anticipate consumers’ needs, offering the right product at exactly the right time. Imagine the same world, but now consider that extensive knowledge of consumers’ preferences also allows precise inferences about their reservation prices (the maximum price each consumer is willing to pay for a good), so that firms can charge different prices for the same product to each of their buyers and absorb the entire surplus arising from an economic transaction. Imagine a world in which the collection and analysis of individual health data allow researchers to discover the causes of rare diseases and the cures for common ones. Now, consider the same world, but imagine that employers are able to predict job candidates’ future health conditions from a few data points extracted from the candidates’ social network profiles – and then, imagine those employers making hiring decisions based on those predictions, without any candidate’s consent or even awareness. The economics of privacy attempts to study the costs and benefits associated with personal information – for the data subject, the data holder, and society as a whole. As a field of research, it has been active for some decades. Advances in data mining, business analytics, and so-called big data have the potential to magnify the size and augment the scope of economic benefits and dangers alike. This chapter surveys the growing body of theoretical and empirical research on the economics and behavioral economics of privacy, and discusses how these streams of research can be applied to the investigation of the implications of consumer data mining and business analytics. Among the many possible interpretations of privacy, this investigation focuses on its informational aspects: the trade-offs arising from the protection or disclosure of personal data.

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