Privacy Regulation and Innovation Policy

Privacy and Security, Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot


Yafit Lev-Aretz and Katherine Strandburg


Yale Journal of Law & Technology, Vol. 22, pp. 256-317, 2020


Some claim that privacy regulation threatens innovation, but regulation is appropriate to correct market failures. Privacy regulation could help align markets and ensure that innovation is consistent with social values.

Policy Relevance

Privacy regulation should be carefully designed. Privacy regulation is no more prone to fail than other types of regulation.

Main Points

  • Regulation should be adopted when it would ameliorate market failures at low cost; market failures such as information asymmetries are classic justifications for regulation, including environmental and consumer protection regulation.
  • “Privacy regulation” includes a broad menu of mechanisms for shaping the collection, retention, flow, and use of personal information (PI).
  • Some observers are skeptical that regulation is justified, because consumers’ willingness to share PI contradicts their self-reported desire for privacy; however, consumer’s actions are distorted, leading to market failure.
    • Consumers’ decisions about privacy affect other consumers, not just themselves.
    • Advertiser-supported business models reveal ad buyer’s preferences, not those of consumers.
    • Consumers cannot easily switch services or cooperate to mobilize for privacy.
    • Consumers do not know what PI is collected, and at what cost.
  • Innovation markets are distorted by “appropriability failures,” as suppliers of innovation will tend to offer too many PI-based goods and services, which promise high returns at low cost.
    • Trade secret law overprotects businesses based on PI.
    • The cost of replicating large firms’ aggregated PI serves as an entry barrier to new firms.
  • Privacy regulation could correct misaligned markets.
    • A rule stopping search engines from keeping PI for more than two weeks would allow new search engines to compete with dominant providers.
    • A rule stopping transfer of PI between firms would do more harm than good, hampering new firms and encouraging startups to vacuum up PI quickly.
  • Regulatory design should be undertaken with care; well-designed regulation will shift innovation into more socially desirable directions, rather than reduce innovation overall.

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