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Privacy Regulation and Innovation Policy

Yafit Lev-Aretz, Katherine J. Strandburg

Industry players and opponents of privacy regulation claim broadly that privacy regulation will “stifle” innovation. This Article responds by bringing together traditional theories of regulation and innovation policy, and applying them in the context of markets involving personal information. Dire predictions about regulation’s impact on innovation are common in many arenas, but seem to hold particularly great policy sway with regard to information privacy regulation. Here, we seek to bring analytical clarity to the debate about information privacy regulation, by showing how the interplay between misaligned demand signals in personal information markets and incentive distortions associated with variation in the extent to which suppliers can appropriate returns from innovative activities jointly determine whether and how the unregulated market’s innovation portfolio deviates from the portfolio of innovative activity that would be most socially desirable.

Our analysis suggests that the characteristics of personal data do entangle some sorts of privacy regulation with appropriability in ways that can affect innovation incentives. Privacy regulation’s possible effects on innovation do not justify blanket opposition, however, because they depend on details of regulatory design. Moreover, some sorts of privacy regulation designed to address misaligned market demand signals can potentially mitigate failures of appropriability and provide a more socially beneficial portfolio of innovation incentives. Proposals for information privacy regulations should thus be judged on their individual merits, taking both misaligned market demand signals and failures of appropriability into account.

The amount of personal information accumulated by companies has mushroomed in recent years, giving rise to calls for more stringent information privacy regulation. In the EU, such calls led to the enactment of the General Data Protection Regulation (GDPR), which came into effect last year. US lawmakers have tended to be more skeptical about regulation than their European counterparts, at least at the federal level. As a result, the question of whether and how to regulate the commercial collection and use of personal information continues to be hotly debated. Nonetheless, while federal proposals remain stalled, some states and even cities are moving ahead with privacy regulation.

Proposals for heightened privacy protections are routinely countered with general claims that privacy regulation will stifle socially valuable innovation. 5 This rhetoric is powerful and superficially convincing. It goes something like this: The information economy is the lifeblood of US economic growth. Increasingly, it runs on personal information collected and aggregated by companies as they provide us with services. The use of this information has brought us many benefits and conveniences and is the mainstay of our most successful companies. Sure, each of us might, in principle, prefer not to have our own activities tracked, but do we really want to risk stalling out the engine of our innovative economy by imposing privacy regulations?