Valuing Intrinsic and Instrumental Preferences for Privacy

I empirically separate two motives for consumers to protect privacy: an intrinsic motive, which is a “taste” for privacy; and an instrumental motive, which reflects the expected economic losses from revealing one’s private information to the firm. While the intrinsic preference is a utility primitive, the instrumental preference arises endogenously from a firm’s usage of consumer data. Combining a two-stage experiment and a structural model, I find that consumers’ intrinsic preferences for privacy range from 0 to 5 dollars per demographic variable, exhibiting substantial heterogeneity across consumers and categories of personal data. This rich heterogeneity in intrinsic preferences dominates the magnitude of instrumental preferences in my experiment. Consumers self-select into sharing their personal data, driven by the combination of these two preference components. The resulting selection pattern deviates from the “nothing-to-hide” argument, a prediction given by models with pure instrumental preferences. I then evaluate two strategies that firms may adopt to correct for biases caused by this privacy-induced selection when collecting and analyzing consumer data. Both strategies can effectively alleviate bias when consumer data are used for inference.