Privacy Regulation and Quality‐Enhancing Innovation*

Abstract

We analyze how a privacy regulation taking the form of a cap on information disclosure affects quality‐enhancing innovation incentives by a monopolist—who derives revenues solely from disclosing user data to third parties—and consumer surplus. If the share of privacy‐concerned users is sufficiently small, privacy regulation has a negative effect on innovation and may harm users. However, if the share of privacy‐concerned users is sufficiently large, privacy regulation has a positive effect on innovation. In this case, there is no trade‐off between privacy and innovation and users always benefit from privacy regulation.