From the Economics of Privacy to the Economics of Big Data

Imagine a world in which consumers’ preferences can be so precisely estimated by observing their online behavior, that firms are able to anticipate consumers’ needs, offering the right product at exactly the right time. Imagine that same world, but now consider that extensive knowledge of consumers’ preferences also allows precise inferences about their reservation prices (the maximum price each consumer will pay for a good), so that firms can charge different prices for the same product to each of their buyers, and absorb the entire surplus arising from an economic transaction.

Imagine a world in which the collection and analysis of individual health data allow researchers to discover the causes of rare deceases and the cures for common ones. Now, consider the same world, but imagine that employers are able to predict job candidates’ future health conditions from few data points extracted from the latter’s social network profiles – and then, imagine those employers making hiring decision based on those predictions, without the candidate’s consent or even awareness.

The economics of privacy attempts to study the costs and benefits associated with personal information – for the data subject, the data holder, and for society as a whole. As a field of research, it has been active for some decades. Progresses in data mining, business analytics, and so-called big data, have the potential for magnifying the size and augmenting the scope of economic benefits and dangers alike. This chapter overviews the growing body of theoretical and empirical research on the economics and behavioral economics of privacy, and discusses how these streams of research can be applied to the investigation of the implications of consumer data mining and business analytics. Among the many possible interpretations of privacy, this capture focuses on its informational aspects: the trade-offs arising from the protection or disclosure of personal data.