Payments and privacy in the digital economy

Abstract

We propose a model of lending, payments choice, and privacy in the digital economy. While digital payments enable merchants to sell goods online, they reveal information to their lender. Cash guarantees anonymity, but limits distribution to less efficient offline venues. In equilibrium, merchants trade off the efficiency gains from online distribution (with digital payments) and the informational rents from staying anonymous (with cash). While new technologies can reduce the privacy concerns associated with digital payments, they also redistribute surplus from the lender to merchants. Hence, privacy enhancements do not always improve welfare.