[LINK] Professors Call Both Sides Wrong on Privacy

Bernard Robertson-Dunn brd at iimetro.com.au
Thu Oct 26 06:56:47 AEST 2006

Professors Call Both Sides Wrong on Privacy
Sue Bushell
24/10/2006 12:40:06

Should households be granted the right to control their personal 
information and to refuse to give it out, as some privacy advocates 
insist? Or are those economists right who argue that privacy in any form 
is harmful since it restricts information flow and hence inhibits 
decision-making, increases transaction costs and encourages fraud?

Two professors at University of California, Berkeley's Haas School of 
Business have recently weighed in on this seemingly endless debate to 
argue their conclusion that neither approach is right.

In an article in the September issue of the journal Quantitative 
Marketing and Economics, Professors Benjamin Hermalin and Michael Katz 
note that privacy can be efficient in certain circumstances but that 
privacy property rights - personal control over one's personal 
information - are often worthless.

"Our analysis demonstrates that there are complicated tradeoffs missed 
by both sides of the debate," they write. "Certainly in the case of 
employment, changes in privacy policy can make some households winners 
and others losers."

The authors note that there has been a long history of contentious 
policy debates and governmental efforts to protect personal privacy, 
particularly the ability to maintain control over the dissemination of 
personally identifiable data: privacy as secrecy.

And they say recent technological developments in information collection 
and processing have heightened privacy concerns, with online bookstores 
knowing what you like to read, TiVo reporting personal viewing habits to 
the company's central database, and airlines keeping a record of where 
you travel. Meanwhile every year privacy bills are introduced in state 
legislatures and the US Congress in response to privacy concerns, yet 
there is little consensus on the appropriate approach.

"There are many calls for strong governmental intervention to restrict 
the use of personally identifiable data. However, there are also calls 
simply to establish appropriate property rights to information on the 
grounds that market forces will then lead to efficient privacy levels," 
they say.

The authors note that proponents of the Chicago School have labelled 
privacy harmful to efficiency because it stops information flows that 
would otherwise lead to improved levels of economic exchange. And they 
agree there are some situations in which allowing households to reveal 
personally identifiable information is beneficial because it allows 
firms to make tailored offers that facilitate transactions that 
otherwise might not have occurred.

Yet they insist that, contrary to the Chicago School argument, the flow 
of information from one trading partner to the other can reduce ex post 
trade efficiency when the increase in information does not lead to 
symmetrically or fully informed parties.

With so many people making extreme claims in discussions of privacy and 
related public policy, and with so little understanding of the 
underlying economics, it is important to identify the fundamental forces 
clearly, they conclude.

"Both sides of the e-commerce privacy debate have overstated their 
cases," they say.

While failing to come to any definitive conclusions about whether one 
can identify conditions under which public policy should or should not 
promote privacy, they authors conclude that the assignment of privacy 
rights to personally identifiable information may have no effect on 
agents' equilibrium welfare levels and need not lead to an efficient 
equilibrium privacy level.

"In some situations, the only effective policy would be explicitly to 
block the dissemination or use of such information. Public policy could 
block dissemination in several ways. One is to make it illegal to reveal 
personally identifiable data. Another is to destroy employment or prison 
records or other forms of tangible evidence, which would prevent 
households from credibly revealing the information even if they chose to 
do so. A related policy would be to refuse to enforce sanctions against 
people who lie about their protected characteristics," they conclude.



Bernard Robertson-Dunn
Sydney Australia
brd at iimetro.com.au

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