Department of Economics pres.
Michael Beauregard Seminar in Macroeconomics: A Growth Model of the Data Economy
Laura Veldkamp, Columbia University
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 classic growth model where firms accumulate data. Data has three key features: 1) Data is a by-product of economic activity; 2) data is information used for resolving uncertainty, and 3) uncertainty reduction enhances firm productivity. 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 the biggest firms in the economy profit primarily from data. While these transition dynamics differ from those of traditional growth models, the long run features diminishing returns. Just like capital accumulation, data accumulation alone cannot sustain growth. Without other improvements in productivity, data-driven growth will grind to a halt.
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