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Privacy and Endogenous Monitoring Choice When Private Information is a Public Good

Listed author(s):
  • Stefan Dodds


    (Department of Economics, Queen's University)

This paper examines why economies endow agents with a degree of personal privacy, even when (a) "no privacy" is ex-post (Pareto) efficient, and (b) a costless monitoring technology exists. A government can provide more of a public good only by identifying "valuable" agents from a population of n. All agents report their type to the government --- truthfully or not --- unsure if they, or others, are being observed. When n is small, it is shown that increasing monitoring effectiveness can actually lead to ex-post inefficiency. Political equilibria are also characterized, where agents vote to constrain the government's monitoring effectivenes but not its ability to levy penalties or rewards. When n is large, all such equilibria are efficient; however, a utilitarian government may not implement taxes to reward honest reporting, nor impose penalties to punish it, even when these options ensure full revelation. Legislating a "right to privacy", by contrast, is always inefficient.

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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1010.

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Length: 35 pages
Date of creation: Sep 2002
Handle: RePEc:qed:wpaper:1010
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  1. Robin Boadway & Motohiro Sato, 2000. "The Optimality of Punishing Only the Innocent: The Case of Tax Evasion," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 7(6), pages 641-664, December.
  2. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
  3. Richard A. Posner, 1980. "The Economics of Privacy," University of Chicago - George G. Stigler Center for Study of Economy and State 16, Chicago - Center for Study of Economy and State.
  4. Beck, Paul J & Davis, Jon S & Jung, Woon-Oh, 2000. " Taxpayer Disclosure and Penalty Laws," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(2), pages 243-272.
  5. Parkash Chander & Louis L. Wilde, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Oxford University Press, vol. 65(1), pages 165-183.
  6. Parsons, Donald O., 1996. "Imperfect 'tagging' in social insurance programs," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 183-207, October.
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