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Privacy and Information Acquisition in Competitive Markets

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  • Taylor, Curt
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    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.

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    Bibliographic Info

    Paper provided by Berkeley Olin Program in Law & Economics in its series Berkeley Olin Program in Law & Economics, Working Paper Series with number qt5hk0k89w.

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    Date of creation: 19 May 2004
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    Handle: RePEc:cdl:oplwec:qt5hk0k89w

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    1. Dana, James D, Jr, 2001. "Competition in Price and Availability When Availability is Unobservable," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 497-513, Autumn.
    2. Jappelli, Tullio & Pagano, Marco, 1991. "Information Sharing in Credit Markets," CEPR Discussion Papers 579, C.E.P.R. Discussion Papers.
    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    4. Alessandro Acquisti & Hal R. Varian, 2002. "Contidioning Prices on Purchase History," Microeconomics 0210001, EconWPA.
    5. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
    6. Alicia H. Munnell, 1992. "Mortgage lending in Boston: interpreting HMDA data," Working Papers 92-7, Federal Reserve Bank of Boston.
    7. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
    8. Curtis R. Taylor, 2004. "Consumer Privacy and the Market for Customer Information," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 631-650, Winter.
    9. George J. Stigler, 1980. "An Introduction to Privacy in Economics and Politics," University of Chicago - George G. Stigler Center for Study of Economy and State 10, Chicago - Center for Study of Economy and State.
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    Cited by:
    1. Benjamin Hermalin & Michael Katz, 2006. "Privacy, property rights and efficiency: The economics of privacy as secrecy," Quantitative Marketing and Economics, Springer, vol. 4(3), pages 209-239, September.
    2. Kai-Lung Hui & I.P.L. Png, 2005. "The Economics of Privacy," Industrial Organization 0505007, EconWPA, revised 29 Aug 2005.
    3. Heidrun Hoppe & Ulrich Lehmann-Grube, 2008. "Price competition in markets with customer testing: the captive customer effect," Economic Theory, Springer, vol. 35(3), pages 497-521, June.

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