Privacy Regulation and Quality Investment

Abstract

This paper analyzes how a privacy regulation restricting data disclosure affects quality investment by a monopoly service provider - who derives revenues solely from sharing user data with third parties - and social welfare. In our model, a user's gross utility from the service depends on its quality and the amount of information shared. We show that in a fully covered market, the regulation reduces quality investment but may still be socially desirable when quality and information are not strong complements. In a partially covered market, the regulation may raise quality and social welfare even when quality and information are highly complementary