Efficiency, Welfare and Ownership of Private Information

Abstract

Unrestricted flows of information usually improve efficiency. The recent growth of the Internet as a medium of communication and commerce, combined with the development of sophisticated software tools have paved the road for the collection and analysis of a vast amount of data about consumers. Firms who possess such information can target individual consumers (or certain groups of consumers) more effectively. We investigate whether consumers can claim some of the value of their own private information, while at the same time efficient flows of information are guaranteed. We address this question in a principal-agent adverse selection model. Prior to the contracting stage, the agent (consumer) chooses how much (precision) of his private information to sell to the principal. This gives rise to a signaling game that precedes the adverse selection stage. We show that there exists a pooling efficient equilibrium, where both agent types sell all their information to the principal.