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.
Recommended citation: Yafit Lev-Aretz & Katherine J. Strandburg, Privacy Regulation and Innovation Policy22 Yale J.L. & Tech. 256 (2020).