Asset Bubbles in the Data Economy

Abstract

Data are emerging as important assets with which firms can apply for credit. We develop a dynamic general equilibrium model with a vertical production chain to characterize the role of rational bubbles in the data economy. In our framework, data have four attributes: they are processed by a chain structure, are byproducts, are nonrivalrous in investment, and are contextual. We show that multiple equilibria exist in the steady state, and the attributes of data affect properties both at the steady state and along the transition dynamics. Our analysis reveals that both the reallocation effect and the efficiency effect that occur in bubbly equilibrium affect the data capital accumulation. Bubbles that emerge in the data product sector can provide additional liquidity to loosen firms' financing constraints, but in an environment where data investment is highly nonrivalrous, bubbles can be welfare-reducing. Bubbles are more likely to emerge when the data depreciation rate or asset specificity is high. Furthermore, our dynamic analysis implies that there could be a data-driven cycle along the transitional path when nonrivalry in data investment exists.

Keywords: Data Economy, Asset Bubbles, Financial Frictions, Data Asset, Production Chain

JEL Classification: E22, E30, G32