Privacy, Property Rights & Efficiency: The Economics of Privacy as Secrecy

Privacy and Security

Article Snapshot


Benjamin E. Hermalin and Michael L. Katz


Quantitative Marketing and Economics, Springer, Vol. 4(3), pages 209-239, September 2006


This paper looks at whether consumers are harmed or helped when information about them is kept private.

Policy Relevance

Sometimes, consumers or workers might be helped by rules protecting privacy. But whether such rules would harm or help consumers depends on complex factors.

Main Points

  • Technology change has lead to much debate about privacy, but little consensus.

  • A person might prefer to keep information about himself to stop someone else from acting on it (for example, those known to smoke might be asked to pay higher insurance rates) or simply because he likes privacy.

  • Some economists argue that privacy tends to harm consumers because firms will have less information to use to make better decisions. Others argue that property rights setting out who owns what information would be best for consumers. 

  • Less information can be better. If life insurance companies used tests to spot those with a high risk of dying young, they might make their insurance too expensive, while those with a low risk decided not to buy insurance at all.

  • It make sense for the government to intervene to protect privacy sometimes. But giving each household the right to own and control information about itself will sometimes harm and sometimes help consumers, depending on complex circumstances.

  • Keeping information private about whether or not a worker is productive can harm businesses and consumers overall. But if most workers are very productive, it might be helpful.

  • Sometimes, it might be helpful for the government to ban the transmission or use of certain types of information, such as the use of prison records in employment. But this might result in firms’ avoiding certain types of workers in hiring.

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