The authors of the presented paper study the performance of privacy policies that regulate how consumer information can be collected and transmitted. They frame this question in a dynamic model where a single consumer interacts sequentially with heterogeneous firms. Each firm uses information about the consumer’s past behaviour to match both the quality and the price of their product to the consumer’s willingness to pay. The consumer therefore manipulates her behaviour to influence the terms of trade with future firms. The authors show that a consumers’ effort to manipulate the firms’ beliefs can be beneficial in equilibrium when the recipient firm is sufficiently similar to the collecting firm (as measured by the relative salience of quality and price of their two products).
In the context of this model, they then study the assignment of control rights over the decision to share transaction-level data. Specifically, to evaluate the impact of proposed and enacted privacy regulation, including mandatory transparency, explicit consent requirements, and limits to discrimination. Their findings suggest that transparency policies have an ambiguous effect on consumer welfare; that consent requirements are unambiguously beneficial to consumers but provide too little data sharing from a social perspective; and that limits to discrimination (where the terms of trade are required to be independent of the consumer’s consent decision) distort the allocation of information in equilibrium even further.
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