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Screening incentives and privacy protection in financial markets: a theoretical and empirical analysis

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  • Jin-Hyuk Kim
  • Liad Wagman

Abstract

type="main"> We study a model in which firms offer financial products to individuals, post prices for their products, and screen consumers who apply to purchase them. Any information obtained in the screening process may be traded to another firm selling related products. We show that firms' ability to sell consumer information can lead to lower prices, higher screening intensities, and increased social welfare. By exploiting variations in the adoption of local financial-privacy ordinances in five California Bay Area counties, we are able to provide simple estimates of the effects of stricter financial-privacy laws on mortgage denial rates during 2001–2006. Consistent with the model's predictions, denial rates for home-purchase loans and refinancing loans decreased in counties where opt-in privacy ordinances were adopted. Moreover, estimated foreclosure start rates during the financial crisis of 2007–2008 were higher in counties where the privacy ordinance was adopted.

Suggested Citation

  • Jin-Hyuk Kim & Liad Wagman, 2015. "Screening incentives and privacy protection in financial markets: a theoretical and empirical analysis," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 1-22, March.
  • Handle: RePEc:bla:randje:v:46:y:2015:i:1:p:1-22
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    File URL: http://hdl.handle.net/10.1111/1756-2171.12083
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    References listed on IDEAS

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    1. repec:kap:ejlwec:v:45:y:2018:i:2:d:10.1007_s10657-017-9563-6 is not listed on IDEAS
    2. Alessandro Acquisti & Curtis Taylor & Liad Wagman, 2016. "The Economics of Privacy," Journal of Economic Literature, American Economic Association, vol. 54(2), pages 442-492, June.
    3. Susan Athey & Christian Catalini & Catherine Tucker, 2017. "The Digital Privacy Paradox: Small Money, Small Costs, Small Talk," NBER Working Papers 23488, National Bureau of Economic Research, Inc.

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