Does Privacy Want to Unravel?

ABSTRACT:

Firms are not shy about disclosing their low prices to attract consumers, but they seem to hesitate when it comes to their data practices. If data is increasingly the price we pay, this is surprising. Before we pronounce the meager evidence of unraveling as a symptom of a market failure, however, we need further investigation. We need to know which equilibrium we are in — one in which disclosure is consistent with consumer preferences; a lemons market, in which asymmetric information plagues consumers and firms and keeps them from the privacy they want; or something in between. That is, we need to know if privacy even wants to unravel. Regulation might be appropriate when (1) there is broad agreement that the conduct at issue is harmful, and (2) the government has sufficient information to craft a correct standard. For all other cases, it is preferable to at least attempt a market allocation of data practices. This could be accomplished by providing the FTC with tools to transform what consumers perceive as cheap talk into credible commitments. Chief among them would be the ability to levy penalties sufficient to deter deception over privacy, while also signaling a reluctance to seek monetary remedies for good faith attempts to make privacy claims more understandable to consumers.