Maryam Farboodi
Abstract: Are the economics of the data economy new? There are surely increasing returns: Data helps firms grow; larger firms, generate more data. At the same time, data has diminishing returns: using more data to inform already precise estimates has low value. To explore how increasing and decreasing returns play out, we construct a dynamic, stochastic economy, where data is a long-lived asset. We learn that in the long run, diminishing returns dominate and dynamics are like a classical economy: Comparative advantage dictates who produces what, and, without additional data externalities, allocations are efficient. But in the short run, increasing returns dominate and new forces arise: Data-intensive goods or services are given away for free; many new firms are unprofitable; and some of the biggest firms profit primarily from selling data.