E-money, Credit Cards, and Privacy

Abstract

We develop a monetary model in which a private company issues digital currency and uses payment data to estimate consumers' preferences. Sellers purchase preference information to produce goods that better match consumers' preferences. Due to reinforcing interactions between the value of preference information and trade volume, multiple equilibria (with and without digital currency) can exist. If multiple digital currencies circulate in the economy, the government can achieve a Pareto improvement by imposing a price ceiling on preference information. When left to market forces alone, socially efficient privacy utilization may not occur. The effects of the introduction of central bank digital currency on welfare depend on whether it can support the socially efficient privacy utilization.