An Informational Theory of Privacy

We develop a theory that explains how and when privacy can increase welfare. Without privacy, some individuals misrepresent their preferences, because they will otherwise be statistically discriminated against. This "chilling effect" hurts them individually, and impairs information aggregation. The information gain from infringing privacy (e.g. by electronic surveillance) can be much smaller than expected ceteris paribus. Overall, privacy is essential for any mechanism of information aggregation, such as markets or a democratic society. It is also redistributive: Like free speech, privacy benefits some and hurts others