understand how individuals and organizations make decisions about the protection and usage
of individuals' data, and what are the consequences of those decisions.
In this document, we report on the economic implications of the protection and revelation
of personal data. In particular, we present the evolution of the economic theory of privacy
(Section 2), we examine current privacy-related trade-os for data subjects and data holders
(Section 3), and we highlight the current economic debate on privacy protection (Section 4).
1.1 The Boundaries of the Economics of Privacy
Before commencing our analysis, we alert the reader of the boundaries inherent to an eco-
nomic approach to ...view middle of the document...
Rather, the economics of privacy tries to understand trade-os associated with the balancing
of one's public and private spheres. Even a broader denition of privacy than the one we
use in this report (for instance: a person's interest to keep certain activities, interests, or
thoughts to herself), can still be given an economic dimension: such interest protects the
individual's psychological and physical well-being; psychological and physical well-being, in
turn, can be interpreted in economic terms as sources of individual utility.
Fourth, there may be privacy dimensions that aect individuals' well-being and are not
merely intangible, but in fact immeasurable: for instance, whereas the US legislator has
taken an utilitarian approach to data protection, the European legislator has tended to dene
privacy as a fundamental human right. As Samuelson (2000) notes, those who conceive of
personal data protection as a fundamental civil liberty, see it as an interest essential to
\individual autonomy, dignity, and freedom in a democratic civil society," independently of
the economic considerations we discuss in this report.
2 The Economic Theory of Privacy
In this section we highlight recent economic theories of privacy. We distinguish between
theories that stress the welfare-diminishing impact of interrupting the
ow of personal in-
formation, and studies that arrive at opposite conclusions.
2.1 Privacy as Source of Economic Ineciencies
Economists have been writing about privacy since, at least, the 1970s. Within the neo-
classical economic theory of perfectly competitive markets, \complete" information (the
availability of relevant information to all market participants) leads to economic eciency:
for instance, when all consumers know the prices at which every rm is selling its product,
competition will drive those prices down to the lowest possible level made possible by the
production technology, and will increase consumers' welfare.
Consequently, according to Chicago School's scholar Posner (1978, 1981), the protec-
tion of privacy creates ineciencies in the marketplace, since it conceals potentially relevant
information from other economic agents. Consider a job seeker who misrepresents her back-
ground and expertise to an hiring rm: Protecting the applicant's personal information will
negatively aect the rm's hiring decision. Therefore, the protection of the former's privacy
comes at the cost of the latter's protability. Hence, removing individuals' personal informa-
tion from the marketplace through privacy regulation ultimately transfers the cost of that
person's possible negative traits on other market players.
Another Chicago School economist, Stigler (1980), believes that governmental interfer-
ence in the market of personal information is destined, at best, to remain ineective: since