Do Data Breach Disclosure Laws Reduce Identity Theft
Full Title of Reference
Do Data Breach Disclosure Laws Reduce Identity Theft?
Sasha Romanosky, Rahul Telang, Alessandro Acquisti, Do Data Breach Disclosure Laws Reduce Identity Theft ? (2007). (Workshop on the Economics of Information Security at Dartmouth College, Jun. 26, 2008). Web
The Purpose of Data Breach Leglisation
The paper starts by outlining that identity theft resulted in corporate and consumer losses of $56 billion dollars in 2005, with about 30% of known identity thefts caused by corporate data breaches. Many US states have responded by adopting data breach disclosure laws that require firms to notify consumers if their personal information has been lost or stolen. According to the authors, the rationale behind such laws is that they will create incentives for firms to internalize more of the cost of a breach through notification letters, customer support call centers, and mitigating actions such as marketing campaigns and free credit monitoring.
Incidence of Laws on Data Breaches
While the laws are expected to reduce identity theft, their full effects have yet to be empirically measured. The authors use panel from the US Federal Trade Commission with state and time fixed effects regression to estimate the impact of data breach disclosure laws on identity theft from 2002 to 2007. The authors find a small effect of law on the incidences of identity thefts (it reduces their rate by just under 2%, on average).
Other Effects of Data Breach Legislation
While the incidence of laws on data breaches is minimal, reducing identity theft is only one means by which these laws can be evaluated: the authors also appreciate that they may have other benefits such as reducing the average victim's losses or improving a firm's security and operational practices. Also, the small incidence does not necessarily suggests that the laws are ineffective for there are other dimensions to the effects of law. For example, the laws naturally lead to more disclosures, and it is also conceivable that the laws may not reduce identity thefts but may decrease the economic losses associated with these thefts, or may reduce of the severity of losses from identity thefts. But overall, data are inconclusive.
Policy and Research Implications
According to the authors, the effectiveness of data breach disclosure laws relies on actions taken by both firms and consumers. Certainly firms must improve their controls, but regardless, once notified consumers must themselves take responsibility to reduce their own risk of identity theft – something which only a minority appears to be doing. It may be that only with time we see more firms internalize the costs, more consumers respond to the risks, and the victimization rates decline. The authors also underline the need for better data collection, measurements and more studies that can inform policy makers, consumer groups and industry participations regarding the role of regulations in this domain. Otherwise, they say, policy decisions will be made by partisan debates, lobbying efforts and unmeasured and conflicting outcomes.
Additional Notes and Highlights
Expertise Required: Economics - Moderate
1. INTRODUCTION 1.1 Motivation for data breach disclosure laws 1.2 Arguments against data breach disclosure laws 2. RELATED WORK 2.1 Information Economics and Disclosure Policy 2.2 Environmental Disclosure and Deterrent Policies 2.3 Criminal Deterrence Policies 3. DATA BREACHES AND BREACH LEGISLATION 3.1 Data Breaches 3.2 US Data Breach Disclosure Legislation 3.3 Conceptual Model 4. IDENTITY THEFT DATA 4.1 Data Sources and Summary Statistics 4.2 Causes of Identity Theft 5. DATA ANALYSIS 5.1 Effect of Law on Identity Theft: Basic Model 5.2 Extended Model 6. RESULTS 6.1 Effect of Law on Identity Theft 6.2 Awareness Bias 6.3 Endogeneity of the law 6.4 Sampling bias 7. DISCUSSION 8. POLICY IMPLICATIONS 8.1 Consumer losses and incentives 8.2 Firm losses and incentives 8.3 Recommendations 9. CONCLUSION