Quantitative Marketing and Economics

, Volume 4, Issue 3, pp 209–239 | Cite as

Privacy, property rights and efficiency: The economics of privacy as secrecy

  • Benjamin E. HermalinEmail author
  • Michael L. Katz


There is a long history of governmental efforts to protect personal privacy and strong debates about the merits of such policies. A central element of privacy is the ability to control the dissemination of personally identifiable data to private parties. Posner, Stigler, and others have argued that privacy comes at the expense of allocative efficiency. Others have argued that privacy issues are readily resolved by proper allocation of property rights to control information. Our principal findings challenge both views. We find: (a) privacy can be efficient even when there is no “taste” for privacy per se, and (b) to be effective, a privacy policy may need to ban information transmission or use rather than simply assign individuals control rights to their personally identifiable data.


Privacy Property rights Personal data Asymmetric information 



The authors would like to thank Thomas Davidoff, Giancarlo Spagnolo, Jean Tirole, Hal Varian, Michael Waldman, and Luc Wathieu, as well as participants in the 2004 “Quantitative Marketing and Economics Conference” and 2004 “Conference on the Economics of Electronics Communications Markets,” for helpful discussions of these issues. We are particularly grateful to an anonymous referee. An earlier version of this paper was titled “Is Privacy Efficient? The Economics of Privacy as Secrecy.”


  1. Acquisti, A., & Varian, H. R. (2005). Conditioning prices on purchase history. Marketing Science, 24(3), 367–381.Google Scholar
  2. Akerlof, G. A. (1970). The market for ‘Lemons’: Quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), 488–500.CrossRefGoogle Scholar
  3. Calzolari, G., & Pavan, A. (2004). On the optimality of privacy in sequential contracting, Unpublished manuscript. Northwestern University.Google Scholar
  4. Coase, R. (1960). The problem of social cost. Journal of Law and Economics, 3(1), 1–44.CrossRefGoogle Scholar
  5. Grossman, S. J. (1981). The informational role of warranties and private disclosure about product quality. Journal of Law & Economics, 24(3), 461–483.CrossRefGoogle Scholar
  6. Hermalin, B. E., & Katz, A. W. (2006). The law & economics of contracts. In: A. M. Polinsky and S. Shavell (eds.), The Handbook of law and economics. Amsterdam: North-Holland (in press).Google Scholar
  7. Hirshleifer, J. (1971). The private and social value of information and the reward to inventive activity. The American Economic Review, 61(4), 561–574.Google Scholar
  8. Hirshleifer, J. (1980). Privacy: Its origin, function, and future. The Journal of Legal Studies, 9(4), 649–664.CrossRefGoogle Scholar
  9. Kahn, C. M., McAndrews, J., & Roberds, W. (2000). A theory of transactions privacy. Working Paper 2000–22, Federal Reserve Bank of Atlanta.Google Scholar
  10. Katz, M. L. (1983). Non-uniform pricing, output and welfare under monopoly. Review of Economic Studies, L, 37–56.Google Scholar
  11. Levin, J. (2001). Information and the market for lemons. RAND Journal of Economics, 32, 657–666.CrossRefGoogle Scholar
  12. Lipsey, R. G., & Lancaster, K. (1956). The general theory of second best. Review of Economic Studies, 24, 11–32.CrossRefGoogle Scholar
  13. Milgrom, P. R. (1981). Good news and bad news: Representation theorems and applications. The Bell Journal of Economics, 12, 380–391.CrossRefGoogle Scholar
  14. Milgrom, P. R., & Roberts, J. (1990). Rationalizability, learning, and equilibrium in games with strategic complementarities. Econometrica, 58, 1255–1277.CrossRefGoogle Scholar
  15. Mirrlees, J. (1971). An exploration in the theory of optimal income taxation. Review of Economic Studies, 38, 175–208.CrossRefGoogle Scholar
  16. Murphy, R. S. (1996). Property rights in personal information: An economic defense of privacy. Georgetown Law Journal, 84, 2381–2417.Google Scholar
  17. Odlyzko, A. (2003). Privacy, economics, and price discrimination on the internet. ACM, Fifth International Conference on Electronic Commerce.Google Scholar
  18. Posner, R. A. (1981). The economics of privacy. American Economic Review, 71(2), 405–409.Google Scholar
  19. Shapiro, C., & Varian, H. R. (1997). US government information policy. Unpublished manuscript, University of CaliforniaBerkeley.Google Scholar
  20. Spence, A. M. (1980). Multi-product quantity-dependent prices and profitability constraints. Review of Economic Studies, 47, 821–841.CrossRefGoogle Scholar
  21. Stigler, G. J. (1980). An introduction to privacy in economics and politics. The Journal of Legal Studies, 9(4), 623–644.CrossRefGoogle Scholar
  22. Smith, M. S. (2003). Internet privacy: Overview and pending legislation. Report for Congress, Congressional Research Service, The Library of Congress, updated February 6, 2003.Google Scholar
  23. Taylor, C. R. (2004) Privacy and information acquisition in competitive markets. Unpublished manuscript, Duke University.Google Scholar
  24. Varian, H. R. (1989). Price discrimination. In: R. Schmalensee and R. Willig (eds.), Handbook of industrial organization, vol. 1. Amsterdam: North-Holland.Google Scholar
  25. Varian, H. R. (1997). Economic aspects of personal privacy. In: Privacy and self-regulation in the information age. Washington, D.C.: U.S. Department of Commerce.Google Scholar
  26. Wathieu, L. (2002) Privacy, exposure and price discrimination. Harvard Business School Marketing Research Papers, No. 02–03.Google Scholar
  27. Williamson, O. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: The Free Press.Google Scholar

Copyright information

© Springer Science + Business Media, LLC 2006

Authors and Affiliations

  1. 1.Haas School of BusinessUniversity of California, BerkeleyBerkeleyUSA

Personalised recommendations