A different thought about privacy

1. Introduction

In the late 1970s, Posner introduced a paper "The Right to Privacy" which delivers a different thought about privacy. Posner's theory aims to analyse privacy in economic standpoint and explain who should be assigned the right to privacy. The dimension of privacy that he looked at is secrecy, as ability to "withhold or conceal information". Personal information means not only about name, sex, age, telephone number, address but it also means valuable and sensitive information of oneself such as: credit score, health condition, work history, Internet surfing habits and so on.

According to Posner, the assignment of privacy right should be in the hand of governments, business firms and other organisations rather than individuals (Posner, 1978). This essay will be divided to 2 parts. Firstly, I will describe the Posner's theory, uncover how the Chicago School (Stigler 1980; Posner 1978, 1979, 1981) and his supporters such as: Charles Kahn, et al. (2000) fight for his conclusion that an economically inefficient market occurs as there has been a tendency of having more concern about personal privacy and lessening organisational privacy. Secondly, I will draw your attention to other papers written by a number of economists such as: Hirshleifer (1979), Laudon (1996), Hermalin and Katz (2005) who either have opposite views to Posner or point out limitations as well as narrow notions of his theory.

2. Posner's theory

Posner's theory focuses on some sensible arguments about the assignment of property right which is also about the allocation of the right to privacy (Posner, 1978). The theory then infers that privacy rights should be allocated to governments, business firms and other organisations instead of being allocated to individuals as individuals receives too much of protection already. Posner also argues that a free market for information with no restriction on collecting and using information of individuals would yield social efficiency. The analysis of the Posner's theory is described in the following paragraphs.

Together with negative externalities, government intervention or non-competitive market, withholding of private information is also a reason which lead to market failure and therefore inefficiency in the whole economy. Posner (1981) suggested that the purpose of concealment of individuals is to mislead the potential trading partner. If private information is not revealed, this might not induce the partner to act in a strategic manner. So as long as the flow of information is restricted, the problem of asymmetric information may arise. These effects of information asymmetries can be described through three basic mechanisms (Hermalin and Katz, 2005):

First, collecting not enough information can lead to forgoing of benefits attaching with matching characteristics between an individual and an organisation (Stigler 1980 and Posner 1981). If the health diagnostics are not recognized, for example, time and money spending on training of the employers can be a costly and impedimental activity. Second, when one party has more information than another, information asymmetries would prevent economic exchange from being efficient and hence lead to moral hazard and adverse selection. The second-hand car market described in Akerlof (1970) and the insurance market are good examples of this problem. Third, privacy can dampen level of investment (Stigler, 1980). For instance, if employers cannot obtain academic performance, or achievements of applicants, then there is perhaps more difficulty in selecting a productive employee. Therefore it can be seen from the three points above that concealment of personal information generally does not maximize social welfare because it inhibits decision making, raises the cost of transaction and discourages people telling the truth.

A. Why not to assign rights to individual

In the next few paragraphs, I will discuss why the assignment of property right should be away from the individual.

Transaction cost is perhaps the most important reason that prevents the allocation of property right to individuals. These costs arise from enforcing or exercising the privacy right. However, individuals want to protect their personal information as well as their reputation. They require their personal information to be protected in the way that no organisations can use and transmit to other parties. Thus, it can be seen that protecting personal reputation is very costly. On the other hand, in order to achieve social efficiency, the costs should be minimized and therefore it is reasonable to allocate property right away to party (individuals) who has high transaction costs.

The second reason that restricts individuals to disseminate their private information is that their information is normally discreditable (Posner, 1978). They do not want to reveal any information relating to their past, present criminal cases, or health problem. From the Princeton Survey Research in 2000, for example, they report that the proportion of American people' willingness to disclose their medical records to hospitals were only 60% (Friedman, 2001). Nevertheless, patients commit to health care providers' trust far more than insurers or other organisations to hold their private information. This indicates that the asymmetric information problem is very likely to happen in insurance market and therefore inefficiency in the market occurs. However, if the incentive to withhold information is subject to culture matter, that type of information is not classified as discreditable in our context. For instance, people can easily be offended when their naked photos floating around on global networking website such as Facebook.

Another reason Posner (1978) mentions is "the casual prying (a term used here without any pejorative connotation) into the private lives of friends and colleagues". It is not easy to observe personalities of a person completely on a first meeting. Hence prying is a reasonable action so that we can gain an understanding about someone. Especially, in business, networking is very important to build mutual beneficial relationship with trading partners. However, the curiosity about the lives of others is a strategic action. Posner points out that individual tend to pry information which adds value to their life. For this reason, the lives of the poor do not catch a lot of attention compared to the rich in terms of frequency of appearance as central characters in novels. Warren and Brandeis (1890) also write, "Gossip is no longer the resource of the idle and of the vicious, but has become a trade which is pursued with industry as well as effrontery.

The next point explaining why individuals are not deserving to hold a property right is because people often "sell" themselves. They do this for the purpose of establishing a certain relationships or business affair. For example, in recruitment process, providing a good CV may secure an applicant a job in the company. Hence, they do not always protect their personal information.

I have directed above the reasons why individuals should not be assigned the property right. It is because the individual's transactions cost of enforcing or exercising rights; the information that they conceal is normally discreditable; casual prying which is a usual notion of socials life is encouraged; and individuals have a tendency to behave strategically to engage in negotiation with others.

B. Why we should assign rights to organisations

In the following paragraphs, I would like to draw your attention on the aspect that why governments, and other organisations should be assigned the property and then how technology can generate efficient outcome in the market of privacy.

The assignment of privacy rights to governments, business companies or other organisations play a crucial role in enhancing the efficiency of the economy. With full personal information about individuals, the firms can discriminate prices more effectively among consumers. If the type of consumer who has different reservation wage is identified, governments and other organisations enable to match the price to consumers' willingness to pay. Price discrimination has a positive impact on consumer surplus and economic efficiency (Odlyzko, 2003). Posner also claims that "these uses of personal information lead to socially efficient outcomes and require no government regulation". In addition, the decision to allocate property right also depends on whether information is a secondary product from production process. In manufacturing industries, information conducted by the firms is sometimes valuable. Then allocating rights to the firms may encourage them to use that valuable information efficiently. This explains why the firms are given privacy rights in the form of patents.

Introduction of innovative technology has also changed individuals' opinion about disclosing their personal information. The development of technology with large and easily accessible database has made it reach the standard where collection, speed of processing and transmitting of information are instantaneous (Kahn, 2000). Let's take Amazon - the largest online retailer in the US - as an example. "We receive and store... information whenever you interact with us", the notice says. The information here includes "the Internet protocol (IP) address used to connect your computer to the Internet; e-mail address; password; browser type and version; operating system" and so on. The collection of information has been streamlined for customers' benefit. So this in turn not only increases productivity and profits to the firm as its business process is now faster and more accurate but also stimulates consumption in the economy. Posner's theory asserts that the efficiency of the market is directly proportionate to the amount of information available to firms and other organisations (Posner, 1978). Thus, it is clearly shown that technology has granted a considerable bargaining power to both retailers and customers in terms of encouraging investment and raising the volume of transaction.

3. Other views towards Posner's theory

The Chicago School introduces the "Free market" approach where the information of oneself is freely disseminating. It follows that the intervention of government would imply economic inefficiency. For instance, if government imposes a restriction on collecting and using personal information about employees to employers, it is likely that unskilled workers would bear a higher risk of disqualifying from recruitment process than skilled workers. However, the "Free market" approach is associated with some limitations.

First, "Free market" approach directs our attention to ex post efficiency. However, it does not recognize that in the market where there is always perfect information, the characteristics in some markets where there is information asymmetry would collapse (Hermalin and Katz, 2005). In the insurance market with asymmetric information, an unhealthy person can get the same insurance offer as a healthy one if an insurer cannot observe the health condition of his customers. On the other hand, perfect information between the insurer and his customer would induce the insurer to offer different offers according to customer's health condition, and therefore an unhealthy person no longer gains from asymmetric information. Hence "what the Chicago School views as an inefficient cross-subsidy from healthy to unhealthy persons in an ex post sense could also be viewed as insurance against bad health in an ex post sense" (Hui and Png, 2005).

Second, the Chicago School's critique overlooks the impact of market imperfection on the availability of information (Hermalin and Katz, 2005). For instance, in the period of Great Depression 1930, the collapse of the economy can be derived from the fact that the prices adjusted slowly to additional information and therefore lead to high rate of unemployment due to high and rigid real wages. So, more information available can lead to a reduction in social welfare.

Final, the Chicago School's argument forgoes direct externalities relating to the way of collecting and using of private information. Information about individuals may be used for a wrong purpose. A typical example of direct externality is the practice of sending junk mails, or spam emails. This activity not only generates costs of intrusion but also results in direct externality to consumers and recipients (Laudon, 1996).

The explanation of positive impacts of information technology on welfare of the economy is also criticized. Although technology can lead to efficient outcomes as described in the example of Amazon above, but advanced technology can also lead to the erosion of privacy. If personal information is collected and used without an individual's consent, privacy is eroding (Laudon, 1996). An invasion of privacy is best reflected when privacy protection law is out of date or when individuals' information gathered is used in another market. There are some organisations that only care about their profits. Hence they sell customers' information to a third party to obtain extra revenue despite the illegality. This therefore yields a decline in social efficiency as the customer faces further privacy intrusion.

With a broader mind in the issue of privacy, Hirshleifer (1980] suggests that privacy may mean autonomy within society rather than secrecy or seclusion as Posner describes in his 1978 articles. Hui and Png (2005) defines those 3 terms as follow: "While secrecy concerns privacy of information, autonomy concerns freedom from observation and seclusion concerns the right to be left alone". So Hirshleifer's article seeks to convey that the Chicago School provides a narrow thought about privacy, whereas he expresses privacy as a "way of organizing the society". Meanwhile, Greenawalt and Noam (1979) propose to assign privacy rights to individuals because people should have a right to conceal their embarrassment or discreditable facts about their past. Furthermore, the Coase Theorem argued that in the absence of property right, the producers would have no incentive to invest, and thereby the good is not produced at its full capacity. So, under Coasian analysis, property right should always exist and the free market for information as Posner suggests would lead to a loss in welfare for producers in the economy. This can be seen in movie industry; illegally downloading movies online would discourage movie production as returns on selling DVD are relatively low compared to the costs of production.

Posner's theory seems to be incomplete if those factors above are taken into account. The theory has a limited angle of view when addressing privacy; it misses out the effect of market imperfection and externalities in the economy; and it is also over-confident about the positive impacts of advanced technology on generating efficient outcomes.

4. Conclusion

This essay points out that, under Posner's analysis, governments, firms and other organisation deserve to hold the right to privacy, while individuals need not be protected. This essay also mentions some criticisms associated with Posner's thought about privacy rights. However, the current trend of regulation has been a tendency towards allocating rights to individuals and declining those to organisations. This trend would not lead to social efficiency according to Posner's prediction.

However, the economy has been growing significantly compared to Posner's generation with an astonishing improvement of information technology. That may mean the risk of privacy intrusions is becoming difficult to appraise. So it is important to establish an environment where there is no confliction between privacy enhancing and privacy invasions. One may propose a solution to this is designing effective privacy policies aiming at assisting individuals in assessing the risk involved with information sharing and encouraging firms to take responsibility in controlling individuals' private information. Government intervention is also essential in protecting the rights of consumers and enforcing the rules so that online transactions as well as other forms of electronic surveillance are no longer a threat to Internet users in the long run.

References:

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