Knowledge that Transforms

This study was begun while the author was on a Brookings Economic Policy Fellowship in the Office of Economic Research of the Economic Development Administration. Acknowledgements are due Paul L. Burgess, Richardj Cebula, James A. Chalmers, Herbert M. Kaufman, Todd Sandler, WalterJ Wadycki, and the referees for this journal, all of whom have made helpful comments on earlier drafts of the paper and none of whom bears any responsibility for remaining shortcomings.

This article summarizes and draws connections among diverse streams of theoretical and empirical research on the economics of privacy. We focus on the economic value and consequences of protecting and disclosing personal information, and on consumers' understanding and decisions regarding the trade-offs associated with the privacy and the sharing of personal data. We highlight how the economic analysis of privacy evolved over time, as advancements in information technology raised increasingly nuanced and complex issues. We find and highlight three themes that connect diverse insights from the literature. First, characterizing a single unifying economic theory of privacy is hard, because privacy issues of economic relevance arise in widely diverse contexts. Second, there are theoretical and empirical situations where the protection of privacy can both enhance and detract from individual and societal welfare. Third, in digital economies, consumers' ability to make informed decisions about their privacy is severely hindered because consumers are often in a position of imperfect or asymmetric information regarding when their data is collected, for what purposes, and with what consequences. We conclude the article by highlighting some of the ongoing issues in the privacy debate of interest to economists. (JEL D82, D83, G20, I10, L13, M31, M37)

Drawing on experimental economics, anthropology, social psychology, sociology, history, the theory of cultural evolution as well as more conventional economic sources, I review models and evidence concerning the impact of economic institutions on preferences, broadly construed. I identify a number of ways in which the form of economic organization of a society appears to influence the process of human development by shaping tastes, the framing of choice situations, psychological dispositions, values, and other determinants of individual behavior. I conclude by commenting on some implications for economic theory and policy analysis.