Search

This paper analyzes the effects of a privacy regulation that caps the level of data disclosure on investment in quality and social welfare. We develop a model in which a monopolist offers a service for free to consumers with heterogeneous privacy preferences, and derives revenues from disclosing consumer data to third parties. We assume that the users of the service choose how much information they provide to the firm. In this setting, regulating the disclosure level can alter both the extensive margin effect and the intensive margin effect of an investment in quality. In the case where the market is fully covered, a welfare-maximizing regulator who can commit ex ante to a cap on disclosure level finds it optimal to do so when the complementarity between quality and information is not too strong. In the case where the market is partially covered, such an an ex ante disclosure cap may be socially desirable even when quality and information are strongly complementary. Finally, we extend our analysis to the case where the regulator maximizes consumer surplus, and to a scenario where the regulator sets a disclosure cap ex post.