DP18459 A Theory of the Effects of Privacy
The development of information technologies has heightened the debate over the potential loss of individual privacy and raised the importance of consumer rights to privacy. However, some of these technologies allow for substantial customization of communications and offerings to consumers. We present a theory of privacy based on the concavity of the indirect utility function with respect to market beliefs: concavity of the indirect utility function makes privacy valuable to individuals. We provide conditions on market settings that generate concavity (or convexity) of the indirect utility function. We apply the framework to product choice, price discrimination, hacking, and health insurance.