IMF, Report: Bank Competition and Household Privacy in a Digital Payment Monopoly

“This paper builds a framework to analyze how private and social optima diverge when a monopolist offers privacy-valuing households a digital payment system that collects data on their habits but can help them signal their creditworthiness to lenders. We find that the monopoly uses its pole position to play off both households and lenders against each other. It squeezes households into a partially unraveling Lemons’ Market, whereby the willingness of some high quality households to disclose prods more tranches of households to differentiate themselves to the detriment of their privacy. To maximize the value of household data in its hands, the monopolist makes its data collection as intrusive as possible, which optimally amplifies the Lemons’ Market dynamics. The monopolist optimizes by pricing information to lenders in a way that maximizes adverse selection for those that choose not to buy data access and thus maximizes the difference in profits between an informed and an uninformed lender … “