Three Essays on the Economics of Digital Privacy

Caleb Fuller

Advisor: Christopher Coyne, PhD, Department of Economics

Committee Members: Peter Boettke, Peter Leeson

Buchanan Hall, #D135
June 08, 2017, 10:00 AM to 07:00 AM


This dissertation explores the twin arguments that the digital marketplace is a failure with respect to privacy and, relatedly, that government can effectively correct this failure. Chapters one and two advance the modest claim that government solutions are imperfect and costly, thus suggesting that future research should shift the focus to a comparative institutional analysis. The final chapter makes the bolder claim that there is little problem in digital markets and thus little need for government to correct deviations from perfection. 

Essay one, “The Perils of Privacy Regulation,” contends that digital privacy regulation, allegedly crafted to protect consumers, engenders a number of under-explored costs. This paper provides evidence for Kirzner’s “perils of regulation” in the digital arena. The regulatory process fails to simulate the market process, stifles entrepreneurial discovery, and enables superfluous discovery. I conclude that policy-makers should consider a more holistic accounting of the costs before imposing additional digital privacy regulation. 

Essay two, “Privacy Law as Price Control,” suggests that one of economists’ most well-researched policy interests—the theory of price controls—can shed light on one of economists' newest interests: digital privacy. Economists and legal scholars already acknowledge that personal data serves as the “price” for accessing many digital platforms. I extend this logic to argue that if a regulation enables consumers to stop supplying this information, while continuing to consume the site's content, it is equivalent to a price control. Next, I discuss unintended consequences that this price control may generate: tie-in sales, investment flight, and altered exchange characteristics. Just as with traditional price controls, the “privacy price control” is a mechanism by which government officials may enhance their popularity. The paper applies the idea of privacy law as price control to a critical examination of the European Union’s “Privacy Directive.” 

Essay three, “Is the Market for Digital Privacy a Failure?”, addresses the following question: Why do so many firms rely on collecting consumer information, a practice that survey evidence shows is widely disliked? Using original survey data from over 1,500 randomly sampled internet users, this paper empirically adjudicates between two competing hypotheses. The first holds that firms employ this strategy because consumers are ill-informed and thus susceptible to exploitation. The second holds that this strategy reasonably approximates consumer preferences. By means of survey, I test a.) the extent of information asymmetry in digital markets, b.) consumers' valuation of privacy, and c.) whether government failure contributes to consumer mistrust of information collection. My results indicate a.) that the extent of information asymmetry is minimal, b.) that there is significant divergence between “notional” and “real” demand for privacy and c.) that government contributes to consumer distrust of information collection by private parties. Significantly, almost 82% of Google users are unwilling to pay anything for increased digital privacy. 

The justification for regulation of digital privacy rests on two related, but questionable, claims: that the market has failed and that government can implement a low-cost solution. In response to these claims my dissertation comprises both an “internal” and an “external” critique of consensus views in the economics of digital privacy literature. First, if one grants the market has failed, it does not follow that government will improve on the failure. Second, there is little evidence to believe that the market has failed. As a result, my dissertation has one major implication: policymakers should adopt greater humility when implementing digital privacy law.