The Economics of Privacy

Privacy and Security, Search and Advertising and Internet

Article Snapshot


Alessandro Acquisti, Curtis Taylor and Liad Wagman


Journal of Economic Literature, Vol. 54, No. 2, pp. 442-492, 2016


Consumers and firms face trade-offs in deciding when to protect or disclose personal information. Whether privacy makes consumers, firms, or society as a whole better off varies widely depending on the context. Consumers often lack information about how data will be used.

Policy Relevance

Protecting privacy is not a “one-size-fits-all” problem. Even when data use is beneficial, privacy concerns should be addressed.

Main Points

  • Personal information has characteristics of a “public good;” once shared, third parties can copy and use the data, but the essence of privacy is being able to control what information is shared.
  • Privacy has both harms and benefits; privacy allows people to conceal negative traits such as debt, but confidentiality encourages people to seek help for problem like addiction.
  • Strict “opt-in” privacy benefits large firms with market power, as newer, smaller firms will lack information about consumers.
  • On platforms, like Google or Amazon, targeted marketing can increase competition; but sellers tend to manipulate consumers to make the most profitable purchases, not those that fit consumer’s needs the best.
  • The European Union’s Privacy Directive, which requires consumers to opt in to the use of tracking cookies, reduces the effectiveness of some types of online ads about 65%.
  • In the health care sector, the use of data can have great benefits, but patients and providers will resist using the data if privacy problems are not resolved.
  • Restricting employers from using some data in hiring can increase or reduce discrimination.
    • Holding orchestra auditions behind a screen increases the number of women hired.
    • Limiting employer access to criminal records reduces hiring of some groups.
    • Many employers learn about applicants through social networks like Facebook.
  • Strict financial privacy regulation can make it harder for low-income consumers to obtain loans or credit cards, or increase lending to high-risk consumers, leading to unpaid loans.


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