Do Data Breach Disclosure Laws Reduce Identity Theft?

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. While the laws are expected to reduce losses, their full effects have yet to be empirically measured. We 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 over the years 2002 to 2006. We find no statistically significant effect that laws reduce identity theft, even after considering income, urbanization, strictness of law and interstate commerce. If the probability of becoming a victim conditional on a data breach is very small, then the law’s maximum effectiveness is inherently limited. Quality of data and the possibility of reporting bias also make proper identification difficult. However, we appreciate that these laws may have other benefits such as reducing a victim’s average losses and improving a firm’s security and operational practices.