The Economics of Privacy

The concept of "privacy" has received a good deal of attention from lawyers, political scientists, sociologists, philosophers and psychologists, but until recently very little from economists. This neglect is on the mend (see, for example, my 1978, 1979a articles and forthcoming book, chs. 9-11; George Stigler), and in this paper I will report on the economic research on privacy in which I and others have been engaged. Some definitional clarification is necessary at the outset. Privacy is used today in at least three senses. First, it is used to mean the concealment of information; indeed, this is its most common meaning today. Second, it is used to mean peace and quiet, as when someone complains that telephone solicitations are an invasion of his privacy. Third, it is used as a synonym for freedom and autonomy; it is in this sense that the Supreme Court has used the word in subsuming the right to have an abortion under the right of privacy (see my 1979b article, pp. 190-200). The third meaning of privacy need detain us only briefly. To affix the term privacy to human freedom and autonomy (as in Jack Hirshleifer) is simply to relabel an old subject-not to identify a new area for economic research. The second meaning of the word privacy set out above invites a slightly novel application of economics. It suggests an economic reason why certain (cerebral) workers have private offices and other (manual) workers do not, why aversion to noise is associated with rising education, and why certain low-level invasions of a person's "private space" (for example, shoving a person roughly but without hurting him) are tortious (see my forthcoming book, ch. 10). But the range of economic applications in this area seems limited. The first meaning of privacy set out above-privacy as concealment of informationseems the most interesting from an economic standpoint. There is a rich and growing literature on the economics of information. It would seem that the same economic factors that determine search behavior by workers and consumers might also determine investments in obtaining, and in shielding, private information. This insight (emphasized in my 1978 article) provides the starting point for the economic analysis of privacy. To relate the economics of privacy to the economics of information in as clear a fashion as possible, consider the example of the employer searching across employees and the employee searching across employers. The employer is looking for certain traits in an employee that may not be obvious, things like honesty, diligence, loyalty, and good physical and mental health. To the extent that the employee is deficient in one or more of these characteristics, he has an incentivestrictly analogous to the incentive of a seller of goods to conceal product defectsto conceal these deficiencies. That is, he has an incentive to invoke a "right of privacy" if the employer tries to "pry" into his private life. The concealment of personal characteristics in the employment contest retards rather than promotes the efficient sorting of employees to employers. By reducing the amount of information available to the "buyer" in the labor market (the employer), it reduces the efficiency of that market. The analysis can easily be generalized, moreover, to other markets, some of them "noneconomic," in which private information is concealed. An example is the marriage "market. " The efficient sorting of females to males in that market is impeded if either spouse conceals material personal information. The extended courtship that remains typical of the marriage market may be due in part to the efforts of prospective spouses to conceal their deficiencies from each other. *University of Chicago Law School.