Does Privacy Harm Innovation? Evidence from a Policy-Change for Mobile Apps for Children

The relationship between privacy and innovation is theoretically unclear and debated in literature. Our paper seeks to add robust empirical evidence to this discussion by studying the effects of increased privacy on firms’ innovation behavior. We study a COPPA-complaint induced policy change on the Google Android platform that restricted app developers’ collection of data as well as targeted advertising if their apps primarily focused on children. To identify the effects, we exploit variation in international content ratings for the same app to construct a quasi-experiment in which some app developers are forced to comply, whereas others are just not forced to comply. We make three preliminary findings. First, we find that the increase in privacy reduced innovation in the affected apps (less major updates). Second, we find that the effects were stronger if the app was provided by small and young firms. Finally, we find that affected firms seek to evade the policy by entering markets with less privacy. Our findings have implications for understanding the economics of privacy, the determinants of innovation, and firm reactions to increased privacy.

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