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Digital Privacy

Author

Listed:
  • Fainmesser, Itay P

    (Johns Hopkins University - Carey Business School)

  • Galeotti, Andrea

    (University of Essex)

  • Momot, Ruslan

    (HEC Paris)

Abstract

We study the incentives of a digital business to collect and protect users’ data. The users' data the business collects improve the service it provides to consumers, but they may also be accessed, at a cost, by strategic third parties in a way that harms users, imposing endogenous users' privacy costs. We characterize how the revenue model of the business shapes its optimal data strategy: collection and protection of users' data. A business with a more 'data-driven' revenue model will collect more users' data and provide more data protection than a similar business that is more 'usage-driven'. Consequently, if users have small direct benefit from data collection, then more usage-driven businesses generate larger consumer surplus than their more data-driven counterparts (the reverse holds if users have large direct benefit from data collection). Relative to the socially desired data strategy, the business may over- or under-collect users' data and may over- or under-protect it. Restoring efficiency requires a two-pronged regulatory policy, covering both data collection and data protection; one such policy combines a minimal data protection requirement with a tax proportional to the amount of collected data. We finally show that existing regulation in the US, which focuses only on data protection, may even harm consumer surplus and overall welfare.

Suggested Citation

  • Fainmesser, Itay P & Galeotti, Andrea & Momot, Ruslan, 2019. "Digital Privacy," HEC Research Papers Series 1351, HEC Paris.
  • Handle: RePEc:ebg:heccah:1351
    DOI: 10.2139/ssrn.3459274
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    References listed on IDEAS

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    Cited by:

    1. Dirk Bergemann & Marco Ottaviani, 2021. "Information Markets and Nonmarkets," Cowles Foundation Discussion Papers 2296, Cowles Foundation for Research in Economics, Yale University.
    2. Dirk Bergemann & Alessandro Bonatti & Tan Gan, 2022. "The economics of social data," RAND Journal of Economics, RAND Corporation, vol. 53(2), pages 263-296, June.
    3. Cong, Lin William & Wei, Wenshi & Xie, Danxia & Zhang, Longtian, 2022. "Endogenous growth under multiple uses of data," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    4. Yosuke Uno & Akira Sonoda & Masaki Bessho, 2021. "The Economics of Privacy: A Primer Especially for Policymakers," Bank of Japan Working Paper Series 21-E-11, Bank of Japan.

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    More about this item

    Keywords

    Information security; online platforms; data-driven businesses; data policy design; advertisement-driven businesses; transaction-driven businesses; welfare;
    All these keywords.

    JEL classification:

    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General

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