Contracting for Privacy Precaution (and a Laffer Curve for Crime)

While Internet consumers and retailers have incentives to contract to protect against criminal privacy invasions by third parties, externality and observability concerns may limit contractual precaution mandates. Contracting between consumers and retailers operates, however, in the shadow of government efforts to deter cybercrime—which in turn can influence the equilibrium information-sharing activity levels as well as private precaution efforts taken by consumers and retailers. This article argues that there is a criminal analog to the Laffer curve. Just as citizens’ reaction to taxation policy raises the possibility that, over some range, lower tax rates may produce higher government revenues, citizens’ reaction to penal policies raises the possibility that, over some range, higher penalties may produce more crime.

Though victims and thieves may be made better off by a “higher crime–higher penalty” equilibrium, these private benefits must be measured against (among other things) the social costs of additional state effort.