The Economics of Digital Privacy

There has been increasing attention to privacy in the media and in regulatory discussions. This is a consequence of the increased usefulness of digital data. The literature has emphasized the benefits and costs of digital data flows to consumers and firms. The benefits arise in the form of data-driven innovation, higher-quality products and services that match consumer needs, and increased profits. The costs relate to the intrinsic and instrumental values of privacy. Under standard economic assumptions, this framing of a cost-benefit trade-off might suggest little role for regulation beyond ensuring consumers are appropriately informed in a robust competitive environment. The empirical literature thus far has focused on this direct cost-benefit assessment, examining how privacy regulations have affected various market outcomes. However, an increasing body of theory work emphasizes externalities related to data flows. These externalities, both positive and negative, suggest benefits to the targeted regulation of digital privacy.