In Defense of Data: Information and the Costs of Privacy

Abstract

The commercial use of information on the Internet has produced substantial benefits for consumers. But, as the use of information online has increased, so have concerns about privacy. In this paper we argue that acting on those concerns would be counterproductive. Far from a 'free lunch,' more privacy implies less information available for producing benefits for consumers, including targeted advertising and the valuable web services it supports, e.g. search engines, email, and social networks. Concerns about privacy may also be misguided. Most data collected about individuals is anonymous, and reducing legitimate uses of online information is not likely to reduce identity theft. Firms appear to be responsive to consumers’ privacy preferences, which also points to a properly functioning market. Our analysis suggests that proposals to restrict the amount of information available would not yield net benefits for consumers.

Keywords: privacy, Internet, personal information, online advertising, behavioral advertising, search engines, identity theft, opt-in, opt-out

JEL Classification: K23, L51, L86, M31