DP16873 Towards a Resolution of the Privacy Paradox

Author(s): Kristóf Madarász, Marek Pycia
Publication Date: January 2022
Date Revised: March 2022
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JEL(s):
Programme Areas: Industrial Organization, Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16873

This paper provides an explanation of the so-called privacy paradox and describes a more general informational 'irrelevance' result. We show that in a large class of imperfect information dynamic games between the buyer, the seller, and privacy platforms, the buyer chooses not to bear any direct cost of protecting her privacy even if leakage of her information affects the prices she faces and hence her surplus from trade. More generally, we show that the informed party's choice of privacy (mode of communication) is driven solely by the direct cost of talk rather than by the information such talk conveys: choosing between different privacy options, the buyer always chooses a cheapest option irrespective of its and its alternatives' informational characteristics.