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CONTACT: Amy Smorodin
June 20 , 2006
(202) 289-8928

Information Market Produces Consumer Benefits
Lenard Testifies on Privacy and Consumer Data before House Subcommittee

WASHINGTON D.C. - Personal information gathered by firms produces great value for consumers and markets, states Thomas Lenard, PFF Senior Fellow and Senior Vice President for Research, in testimony presented to the U.S. House Committee on Energy and Commerce Subcommittee on Commerce, Trade and Consumer Protection. In his testimony for the hearing "Privacy in the Commercial World II," Lenard states lawmakers should carefully analyze the consequences of privacy and data security regulation to assure that the benefits are sufficient to justify the costs.

When considering regulation of consumer information markets, Lenard urges the subcommittee to examine if there are market failures that cause clear harm to consumers. In addressing concerns that "too much" consumer information is being collected, Lenard states that "markets work better with more information." He explains, "As the cost of information goes down, market participants obtain more of it and, consequently, make better decisions."

Lenard cites many positive benefits from the availability of this information, including targeted marketing, better estimates of consumer demand and reduction in inventory costs. He also explains that an abundance of consumer information can correct market failures caused by "asymmetric information." Financial and insurance markets can be particularly susceptible to this when they have inadequate information on risk factors concerning an applicant. Finally, widespread availability of information can also facilitate competition in sectors that require consumer data.

In his testimony, Lenard also addresses data security mandates, which can cause unintended harm to both consumers and markets. Overreaction to data security breaches can cause firms to limit access to their information, disrupting the free flow of information that is vital to the functioning of markets. Consumers who overreact to data security breaches may move their transactions offline, which studies show can make them more vulnerable to identity theft.

Lenard urges lawmakers to acknowledge possible unintended consequences of information regulation. Specifically, privacy and security regulations can unfairly impact small firms because of the high fixed cost of compliance. The regulatory burden can also deter new entrants into sectors that rely on consumer information, discouraging competition. In order to decrease the cost of compliance with multiple state data security and privacy mandates, however, Lenard suggests preemptive federal legislation may be necessary.

Lenard's full written testimony can be found on the PFF website.

The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.



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