Privacy Protection and Technology Diffusion: The Case of ElectronicMedical Records

Some policymakers argue that consumers need legal protection of theirprivacy before they adopt interactive technologies. Others contend thatprivacy regulations impose costs that deter adoption. We contribute tothis growing debate by quantifying the effect of state privacyregulation on the diffusion of Electronic Medical Record technology(EMR). EMR allows medical providers to store and exchange patientinformation using computers rather than paper records. Hospitals may notadopt EMR if patients feel their privacy is not safeguarded byregulation. Alternatively, privacy protection may inhibit adoption ifhospitals cannot benefit from exchanging patient information with oneanother. In the US, medical privacy laws that restrict the ability ofhospitals to disclose patient information vary across time and acrossstates. We exploit this variation to explore how privacy laws affectwhether hospitals adopt EMR. Our results suggest that inhibition ofEMR's network benefits reduces hospital adoption by up to 25 percent. Wefind similar evidence when we control for the endogeneity of state lawsusing variation in signups to the 'Do Not Call' list.