Damocles's Switchboard: Information Externalities and the Autocratic Logic of Internet Control

This paper advances a theory for the autocratic logic of internet control. Politically motivated internet control generates a positive externality for domestic data-intensive firms and a negative externality for domestic knowledge-intensive research entities. Exploiting a major internet control shock in 2014, I find that Chinese data-intensive firms gained 26 percent in revenue over other Chinese firms as the result of internet control. The same shock incurred a 10 percent decline in research quality from Chinese researchers, conditional on the knowledge intensity of their discipline. It also reduced the research quality from Chinese researchers relative to their US counterparts by 22 percent in all disciplines. Due to the positive data externality, internet control enacted to prevent domestic threats challenges the state's competing need for data sovereignty against foreign threats. Meanwhile, the state shields certain foreign knowledge-intensive actors from the negative knowledge externality to avoid the immediate economic costs they might otherwise impose. Qualitative evidence supports both implications, highlighting the centrality of short-term interests and foreign actors in autocratic decision making.