Aug. 31, 2006
Ute S. Frey
UC Berkeley Haas School of Business
UC Berkeley Haas School of Business
These days, Internet bookstores track what you like to read, TiVo knows your television viewing habits, and airlines keep a record of where you travel. Just a few weeks ago, AOL was apologizing for disclosing the Internet searches of 657,000 Americans – information that was detailed enough for a New York Times reporter to identify an “anonymous” user in Georgia.
Such recent technology innovations have prompted some privacy advocates to argue for giving households privacy property rights – the right to control their personal information and deny giving it out. On the other hand, some economists have argued that privacy is harmful in any form because it restricts information flow and consequently inhibits decision-making, increases transaction costs and encourages fraud.
Two professors at University of California, Berkeley’s Haas School of Business recently joined the fray and found that neither approach is fully right. In an article in the September issue of the journal Quantitative Marketing and Economics, Professors Benjamin Hermalin and Michael Katz found that privacy can be efficient in certain circumstances but privacy property rights – personal control over one’s personal information – are often worthless.
Say, for example, a job candidate has the right to withhold health information from a potential employer. Such silence would likely be inferred by the employer to mean that his or her health is poor. The same holds true for a job candidate who declines to answer a question about whether he was in prison: If the job candidate declines to answer, the employer would likely assume the candidate has served a prison term.
"The right to remain silent can be completely valueless because if you exercise that right, everyone may assume the worst about you," says Katz, who holds the Sarin Chair in Strategy and Leadership and is director of the Center for Telecommunications and Digital Convergence. "If you have a small health problem, for example, you may feel compelled to reveal it so that your potential employer doesn't assume you have a terrible health history."
Under current law, employers can legally ask applicants about their criminal history, although California law restricts how employers can use information concerning people who have been merely arrested. The Americans with Disabilities Act, meanwhile, prohibits disability-related questions or medical exams before a real job offer is made, but an employer may ask the applicant if he may need any reasonable accommodations to perform a job.
In addition to creating a general model that suggested privacy property rights are irrelevant, Katz and Hermalin also crafted a specific model of price discrimination by a monopolist who seeks personal information about potential trading partners. This model could be applied to the debate over whether e-commerce and other technologies such as supermarket frequent-buyer cards will lead to pervasive, inefficient price discrimination, as some privacy advocates charge.
“Both sides of the e-commerce privacy debate have overstated their cases,” concluded Katz and Hermalin, the Willis H. Booth Professor of Banking and Finance. They found 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.
For a copy of the article “Privacy, Property Rights and Efficiency: The Economics of Privacy as Secrecy,” by Professors Benjamin and Michael Katz, in Quantitative Marketing and Economics visit: