A 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 dynamic equilibrium 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 firms are unprofitable and why some of the biggest firms in the economy profit primarily from selling data. While the transition dynamics of the data economy and a capital economy differ, the long-run dynamics are similar: Data has diminishing returns; comparative advantage dictates who produces what, and capital allocations are efficient. However, even in the long run, data creates new economic distortions, relative to social optimum. MIT Sloan School of Business, NBER, and CEPR; farboodi@mit.edu. Columbia Graduate School of Business, NBER, and CEPR, 3022 Broadway, New York, NY 10027; lv2405@columbia.edu. 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.