May 27, 2021

Brave new data – Policy pathways for the data economy in an imperfect world

Data are playing an increasingly important role in our economy. Companies use data to improve and innovate their products and services. Medical data, for instance, are used to train algorithms in detecting tumours, and user data for social media platforms are analysed to develop targeted advertising. Data are also used by consumers to help them make better-informed purchasing decisions, for example through reviews or ratings.
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Data are playing an increasingly important role in our economy. Companies use data to improve and innovate their products and services. Medical data, for instance, are used to train algorithms in detecting tumours, and user data for social media platforms are analysed to develop targeted advertising. Data are also used by consumers to help them make better-informed purchasing decisions, for example through reviews or ratings.

May 27, 2021
The data economy has drastically altered our lives in the last two decades. Search engines and smartphones have become ubiquitous. Sharing of data is a key element of the data economy. Often, individual consumers and organizations decide themselves whether to share data or not. Individual decision making forms the starting point of data policy. The choice to share data, however, also impacts others. Privacy of individuals, for example, is increasingly intertwined. From a societal point of view, we sometimes share too much data while in other instances we share too little. What alternatives do we have for organizing the data economy?

Scientists are trying to answer this question. In this Background Document we review the economics literature on this topic. We analyze the data value chain and study how data change economic costs. There are several market failures, such as externalities and unbalanced market power, that distort the working of the data economy. To address these market failures several policy options in the data economy are conceivable. Leveraging collective action in policy design, as an alternative to the traditional focus on informed individual decision making, increases the likelihood of realizing optimal social outcomes.

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