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On legal bubbles: Shockwaves at the core of the digital economy

Posted on September 16, 2021November 15, 2021 by Nikhilesh Sinha

Summary of JOIE article ( First View 05 July 2021) by Marco Giraudo, Department of Law, University of Turin, Turin, Italy. The full article is available on the JOIE website.

This article traces the main legal-economic dynamics underlying the rise of the personal data-driven economy and argues that a legal bubble has characterized its development so far. The loweringof the costs of collecting, storing, and processing personal data has paved the way for a whole ecosystem of innovative activities. The strong economic interests attached to the commodification of the new resource have fueled the bid to secure property rights over personal data, despite the early uncertainty as to its legal implications in terms of the prevailing order of rights.  The main fear of the lawmakers was that the commodification of personal data would have weakened the legal protection of hierarchically superior legal interests – e.g. fundamental rights, competition law, and the democratic order. As such, the main concern was that allowing personal data to be collected and traded would have implied the violation of constitutionally protected interests.

The initial predominance of a management-based regulatory solution implied that economic agents could prototype legal solutions by contract. This approach delegated to investors the legal balancing of the short-term benefits of commodification – by offering “free” services in exchange for users’ personal data – and the risk of violating hierarchically superior rights. Within such framework, entrepreneurs like Facebook, Google, Apple, and other companies have taken the lead in defining property rights over data, enabling personal data commodification by way of contract. Bold legal innovations were released on the spur of over-inflated optimism, thus unlocking avenues of technological innovation. 

Through the early ‘codification’ in case law, the optimistic narratives attached to the benefits of the ‘sharing society’ spread out within the judiciary, thus reinforcing the commodification assumption underpinning a soaring industry. In fact, the courts’ support sounded like a green light for investments. This judiciary stance led to the construction of a multi-billion industry based on property rights by contract, where ‘notice and consent’ forms framed ownership solutions over the new resources, as well as over the activities they enable. Any attempt to establish stricter data protection rules was seen as an attempt to impose distorting  “price control policies”. 

For more than a decade, two co-evolving dynamics within the judiciary and the economy have supported the view that a newly discovered resource, personal data, could become “the new currency of the internet”, thereby unleashing investments and participation in the rising personal-data-driven industry. This occurred despite expressions of skepticism about the fact that contractual solutions were actually securing the proper balance between property rights over personal data and the hierarchically superior rights. 

Over the last few years, however, this widespread assumption has begun to falter, as courts and rule makers learned about the actual implications of personal data commodification in terms of its conflict with other prevailing rights. Some observers argue that the industry has long reached a legal “boiling point” and there is growing concern about the fact that the sector is actually “trading fundamental rights”. Courts and legislative branches of Western nations (e.g. US and EU) have scrambled to regain control on the legal foundations of the industry. Rule makers too are now willing to roll out stronger regulation in the domain of data protection and privacy as well as in other related domains. Yet, today the personal data driven economy exhibits record breaking stock market valuations and continues attracting investments at a record pace. 

From a legal and economic viewpoint, however, economic agents’ and investors’ failure to promptly adapt their business models to the emergence of substantial limits to personal data commodification is puzzling. As if a market could thrive despite the lack of sound legal foundations. This is tantamount to a form of legal “exuberance” where, instead of conforming to emergence and evolution of laws’, economic agents double down in their “commodification bet” as if they could rely on some form of implicit “legal bailout” in the rescue of an increasingly strategic industry. 

To make sense of the potential economic consequences of the anomalous functioning of the legal foundations of the industry, this article articulates the theory of legal bubbles.  The main intuition is very simple. Akin to speculative bubbles that are driven by institutional imbalances favoring the spread of over-inflated expectations on price stability and are fueled by herd behavior, the legal bubbles emerge from similar institutional imbalances – inside and outside the market process

In other words, a legal bubble is elicited by a form of ‘legal innovation hype’ inside the judicial system, whereby rapid consensus emerges on the spur of over-inflated expectation on the validity of legal solutions, which in turn reinforces investments within the industry. This opens the door to the possibility of a downturn, and eventually of a disruptive loop and substantial economic disarray.  A period of legal fragility appears to be open as the burst of the bubble follows courts’ gradual, continuous revocation of their support to commodification claims, with little space of maneuver for rule-makers to legally bailout the industry.

Awareness of the existence of such consequences is essential at a time where tumultuous technological innovation may fuel various legal bubbles. Face recognition, biotechnology, artificial intelligence are only some of thedisruptive technologies that are at risk in this respect. Since the full spectrum of their unintended consequences is largely unforeseeable in terms of threats to fundamental rights and other hierarchically superior legal interests, economic agents should explore innovative forms to hedge against the risk of legal bubbles, either through innovative forms of insurance, or by way of alternative financial hedge. In turn, regulators should find institutional innovations to reduce costs asymmetries that favor the over-representation of one-sided views on the legal implications of innovative solutions. They should favor the emergence of more balanced and grounded, shared legal expectations. 

Institutional bubble-wise phenomena are there to remind us that innovative markets are contingent on the innovative legal solutions they use, and on their grounding. As long as their legal foundations are not properly settled, the economic value thereby generated and exchanged remains at risk. Exuberance is not enough to build a prosperous future. The need to preserve the coordination function of prices as well as the stabilizing features of legal rules should be taken seriously.


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