A Growth Model of the Data Economy
The rise of information technology and big data analytics has given rise to "the new economy." But are its economics new? This article constructs a growth model where firms accumulate data, instead of capital. We incorporate three key features of data: 1) Data is a by-product of economic activity; 2) data is information used for prediction, and 3) uncertainty reduction enhances firm profitability. The model can explain why data-intensive goods or services, like apps, are given away for free, why many new entrants are unprofitable and why some of the biggest firms in the economy profit primarily from selling data. While our transition dynamics differ from those of traditional growth models, the long run still features diminishing returns. Just like accumulating capital, accumulating predictive data, by itself, cannot sustain long-run growth.
Thanks to Rebekah Dix and Ran Liu for invaluable research assistance and to participants at the 2019 SED plenary, Kansas City Federal Reserve, 2020 ASSA and Bank of England annual research conference for helpful comments and suggestions. Maryam Farboodi receives research support from MIT Sloan school of management. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.