The Economic Impact of Privacy Violations and Security Breaches

Abstract

Privacy and security incidents represent a serious threat for a company’s business success. While previous research in this area mainly investigated second-order effects (e.g., capital market reactions to privacy or security incidents), this study focuses on first-order effects, that is, the direct consumer reaction. In a laboratory experiment, the authors distinguish between the impact of privacy violations and security breaches on the subjects’ trust and behavior. They provide evidence for the so-called “privacy paradox” which describes that people’s intentions, with regard to privacy, differ from their actual behavior. While privacy is of prime importance for building trust, the actual behavior is affected less and customers value security higher when it comes to actual decision making. According to the results, consumers’ privacy related intention-behavior gap persists after the privacy breach occurred.