INTRODUCTION
In his pioneering research, political scientist Alan Westin defined privacy as ‘the claim of individuals, groups, or institutions to determine for themselves when, how and to what extent information about them is communicated to others’ (1967, p.
7). Institutional privacy is usually now discussed as part of commercial confidentiality, while a broader concept of individual privacy is often used in public debate, taking in other concepts such as autonomy and emotional release. But Westin’s information-focused definition is particularly appropriate for individuals in the information economies that have developed since the late twentieth century. It is also the focus of the ‘data protection’ laws and regulations that have emerged globally since their development in Europe during the 1970s.Economists have investigated a range of questions regarding individual and business decisions related to the use of personal information, as well as the possible contours and effects of privacy regulation. This has included analyses of the incentives that motivate individuals to disclose personal information in different situations, and firms to use that information to create personalized marketing and products. Both parties can suffer harm if this personal data is abused, leading to pressure for regulatory requirements such as disclosure and liability for security breaches, transparency about data use, and baseline security protections.
More recently, behavioral economists have tried to understand the factors underlying the ‘privacy paradox’ - that individuals commonly claim to be concerned about privacy, but behave in ways that seemingly contradict that claim (Spiekermann et al., 2001). Individual privacy decision-making seems to be particularly susceptible to some of the cognitive biases identified by Daniel Kahneman, Amos Tversky and others, again leading to pressure for regulation to help individuals protect their own long-term interests.
This chapter first describes the standard economic analysis of privacy, data protection and surveillance, looking at the costs and benefits to different parties and the incentives each therefore has, as well as the aggregate social welfare impacts of their decisions. It then considers the market failures that can lead to non-optimal outcomes, including information asymmetries, negative externalities, and cognitive biases of individual decision-makers. Finally, it analyzes the economic impact of various regulatory options for correcting these market failures, an important consideration given that most advanced and many emerging economies now have extensive systems of regulation in this area.
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