February 20, 2018

Archives for March 2008

Privacy: Beating the Commitment Problem

I wrote yesterday about a market failure relating to privacy, in which a startup company can’t convincingly commit to honoring its customers’ privacy later, after the company is successful. If companies can’t commit to honoring privacy, then customers won’t be willing to pay for privacy promises – and the market will undersupply privacy.

Today I want to consider how to attack this problem. What can be done to enable stronger privacy commitments?

I was skeptical of legal commitments because, even though a company might make a contractual promise to honor some privacy rules, customers won’t have the time or training to verify that the promise is enforceable and free of loopholes.

One way to attack this problem is to use standardized contracts. A trusted public organization might design a privacy contract that companies could sign. Then if a customer knew that a company had signed the standard contract, and if the customer trusted the organization that wrote the contract, the customer could be confident that the contract was strong.

But even if the contract is legally bulletproof, the company might still violate it. This risk is especially acute with a cash-strapped startup, and even more so if the startup might be located offshore. Many startups will have shallow pockets and little presence in the user’s locality, so they won’t be deterred much by potential breach-of-contract lawsuits. If the startup succeeds, it will eventually have enough at stake that it will have to keep the promises that its early self made. But if it fails or is on the ropes, it will be strongly tempted to try cheating.

How can we keep a startup from cheating? One approach is to raise the stakes by asking the startup to escrow money against the possibility of a violation – this requirement could be build into the contract.

Another approach is to have the actual data held by a third party with deeper pockets – the startup would provide the code that implements its service, but the code would run on equipment managed by the third party. Outsourcing of technical infrastructure is increasingly common already, so the only difference from existing practice would be to build a stronger wall between the data stored on the server and the company providing the code that implements the service.

From a technical standpoint, this wall might be very difficult to build, depending on what exactly the service is supposed to do. For some services the wall might turn out to be impossible to build – there are some gnarly technical issues here.

There’s no easy way out of the privacy commitment problem. But we can probably do more to attack it than we do today. Many people seem to have given up on privacy online, which is a real shame.

Privacy and the Commitment Problem

One of the challenges in understanding privacy is how to square what people say about privacy with what they actually do. People say they care deeply about privacy and resent unexpected commercial use of information about them; but they happily give that same information to companies likely to use and sell it. If people value their privacy so highly, why do they sell it for next to nothing?

To put it another way, people say they want more privacy than the market is producing. Why is this? One explanation is that actions speak louder than words, people don’t really want privacy very much (despite what they say), and the market is producing an efficient level of privacy. But there’s another possibility: perhaps a market failure is causing underproduction of privacy.

Why might this be? A recent Slate essay by Reihan Salam gives a clue. Salam talks about the quandry faced by companies like the financial-management site Wesabe. A new company building up its business wants to reassure customers that their information will be treated with the utmost case. But later, when the company is big, it will want to monetize the same customer information. Salam argues that these forces are in tension and few if any companies will be able to stick with their early promises to not be evil.

What customers want, of course, is not good intentions but a solid commitment from a company that it will stay privacy-friendly as it grows. The problem is that there’s no good way for a company to make such a commitment. In principle, a company could make an ironclad legal commitment, written into a contract with customers. But in practice customers will have a hard time deciphering such a contract and figuring out how much it actually protects them. Is the contract enforceable? Are there loopholes? The average customer won’t have a clue. He’ll do what he usually does with a long website contract: glance briefly at it, then shrug and click “Accept”.

An alternative to contracts is signaling. A company will say, repeatedly, that its intentions are pure. It will appoint the right people to its advisory board and send its executives to say the right things at the right conferences. It will take conspicuous, almost extravagant steps to be privacy-friendly. This is all fine as far as it goes, but these signals are a poor substitute for a real commitment. They aren’t too difficult to fake. And even if the signals are backed by the best of intentions, everything could change in an instant if the company is acquired – a new management team might not share the original team’s commitment to privacy. Indeed, if management’s passion for privacy is holding down revenue, such an acquisition will be especially likely.

There’s an obvious market failure here. If we postulate that at least some customers want to use web services that come with strong privacy commitments (and are willing to pay the appropriate premium for them), it’s hard to see how the market can provide what they want. Companies can signal a commitment to privacy, but those signals will be unreliable so customers won’t be willing to pay much for them – which will leave the companies with little incentive to actually protect privacy. The market will underproduce privacy.

How big a problem is this? It depends on how many customers would be willing to pay a premium for privacy – a premium big enough to replace the revenue from monetizing customer information. How many customers would be willing to pay this much? I don’t know. But I do know that people might care a lot about privacy, even if they’re not paying for privacy today.

InfoTech and Public Policy Course Blog

Postings here have been a bit sparse lately, which I hope to remedy soon. In the meantime, you can get a hearty dose of tech policy blog goodness over at my course blog, where students in my course in Information Technology and Public Policy post their thoughts on the topic.