Privacy and Information Acquisition in Competitive Markets

Duke University, Durham NC

Investigators

Abstract

Privacy and Information Acquisition in Competitive Markets Recent years have witnessed dramatic advances in virtually all aspects of information technology including: storage, processing, and transmission. Between 1988 and 2000, the cost of a gigabyte of hard disk storage fell from about $11,500 to around a dollar. Between 1989 and 2000, the number of transistors on a standard PC mother board increased by a factor of 42. Between 1990 and 1998, the number of nodes on the Internet increased from 313,000 to 29,670,000. Such innovations in information technology have revolutionized many industries. They have reshaped modern economies and profoundly impacted society. They have given rise to new markets for new goods and services while at the same time spawning new concerns regarding questions of public policy. The question at the heart of this project concerns the impact of the revolution in information technology on personal privacy. The dramatic advances in information technology occurring over the past 15 years have generated both social benefits and costs. The benefits derive from a more efficient allocation of goods and services and job assignments. For example, insurance policies, debt contracts, and apartment leases can be tailored to better fit the characteristics of prospective customers. Likewise, employment and college-enrollment offers can be better matched with the skills and aptitudes of applicants. There are, however, two costs associated with increased information acquisition. First, there is obviously a direct resource cost involving the collection, storage, and processing of data. Second, there is a cost in terms of personal privacy. Specifically, while consumers and/or prospective employees are typically willing to divulge some personal information in order to secure more favorable contract terms, firms often do not possess incentives for efficient information collection when screening their applicants. In particular, when firms' data-collection efforts are unobservable (and therefore not contractible), a divergence between the marginal social benefit and marginal private benefit of information acquisition arises. In environments where information acquisition corresponds to searching for `bad news' about applicants, the marginal private benefit is typically larger, inducing firms to reject too many applicants. By contrast, in environments where information acquisition corresponds to searching for `good news,' the marginal private benefit to screening is lower than the marginal social benefit, and too few applicants are approved. Hence, firms have incentives to search too hard for bad news about their applicants and not hard enough for good news. This project will investigate the economic consequences deriving from this fundamental divergence between the private and social benefits of information acquisition in a variety of market settings. Issues such as the assignment of privacy rights, price and access discrimination, and the efficiency of trading relationships will be analyzed.