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Privacy and Information Acquisition in Competitive Markets

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  • Taylor, Curt
Abstract
Personal privacy is studied in the context of a competitive product (or labor) market. Firms initially post prices (or wages) they promise to charge (or pay) individuals whose applications are ultimately approved. Contracts are incomplete because the amount of information firms acquire about applicants cannot be observed. When information acquisition corresponds to searching for bad news, firms search too hard in equilibrium. Consumers can ameliorate this by demanding inefficiently small levels of output. If economic characteristics differ across groups of applicants and price discrimination is prohibited, then members of the high-risk group are subjected to more scrutiny and suffer disproportionately high rejection rates. When information acquisition corresponds to searching for good news, firms acquire too little information about their applicants in equilibrium. Finally, if rejected applicants remain in the market and continue to apply to dfferent firms, then the resulting adverse selection may be so severe that all parties would be better off if no information was collected at all.

Suggested Citation

  • Taylor, Curt, 2004. "Privacy and Information Acquisition in Competitive Markets," Berkeley Olin Program in Law & Economics, Working Paper Series qt5hk0k89w, Berkeley Olin Program in Law & Economics.
    • Handle: RePEc:cdl:oplwec:qt5hk0k89w
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    References listed on IDEAS

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    Cited by:

    1. Kai-Lung Hui & I.P.L. Png, 2005. "The Economics of Privacy," Industrial Organization 0505007, University Library of Munich, Germany, revised 29 Aug 2005.
    2. Heidrun Hoppe & Ulrich Lehmann-Grube, 2008. "Price competition in markets with customer testing: the captive customer effect," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(3), pages 497-521, June.
    3. Benjamin Hermalin & Michael Katz, 2006. "Privacy, property rights and efficiency: The economics of privacy as secrecy," Quantitative Marketing and Economics (QME), Springer, vol. 4(3), pages 209-239, September.

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