Data in Growth Model

Abstract

We build a novel endogenous growth model with consumer-generated data as a new and key factor of production. Consumers can choose the quantity of data that can be used by innovative intermediate producers at certain price, whereas bearing a cost due to potential data privacy violation. Innovative intermediate producers utilize the raw data of consumers to create data products which are eventually sold to final goods producers with appropriate Intellectual Property protection, i.e., Data IP. Disutility from data privacy violation mitigates the positive spillover of data products. It is shown in such an economy that although the decentralized economy can achieve the same growth rate as the social optimum on the Balanced Growth Path, net consumer welfare will be strictly lower in the decentralized economy. It is interesting to show that under some conditions the decentralized economy can achieve a GDP level higher than the social optimum in equilibrium, but at a cost of an even larger infringement on data privacy of consumers than that in a social planner s economy. The root of inefficiency of the decentralized economy lies in that R&D firms in this case tend to employ too little labor and overuse the data generated from consumers. To correct this inefficiency, one policy implication is to eliminate data abuse by subsidizing R&D firms for employing more labor or imposing tax for using consumer data. Finally, we analyze and compare the transitional dynamics of various models with different degrees of risk aversion.