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Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending

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  • Erik Brynjolfsson

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

  • Lorin Hitt

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

Abstract

The "productivity paradox" of information systems (IS) is that, despite enormous improvements in the underlying technology, the benefits of IS spending have not been found in aggregate output statistics. One explanation is that IS spending may lead to increases in product quality or variety which tend to be overlooked in the aggregate statistics, even if they increase output at the firm-level. Furthermore, the restructuring and cost-cutting that are often necessary to realize the potential benefits of IS have only recently been undertaken in many firms. Our study uses new firm-level data on several components of IS spending for 1987--1991. The dataset includes 367 large firms which generated approximately 1.8 trillion dollars in output in 1991. We supplemented the IS data with data on other inputs, output, and price deflators from other sources. As a result, we could assess several econometric models of the contribution of IS to firm-level productivity. Our results indicate that IS spending has made a substantial and statistically significant contribution to firm output. We find that the gross marginal product (MP) for computer capital averaged 81% for the firms in our sample. We find that the MP for computer capital is at least as large as the marginal product of other types of capital investment and that, dollar for dollar, IS labor spending generates at least as much output as spending on non-IS labor and expenses. Because the models we applied were similar to those that have been previously used to assess the contribution of IS and other factors of production, we attribute the different results to the fact that our data set is more current and larger than others explored. We conclude that the productivity paradox disappeared by 1991, at least in our sample of firms.

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File URL: http://dx.doi.org/10.1287/mnsc.42.4.541
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 42 (1996)
Issue (Month): 4 (April)
Pages: 541-558

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Handle: RePEc:inm:ormnsc:v:42:y:1996:i:4:p:541-558

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Keywords: information technology; productivity; production function; computers; software; IS budgets;

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  1. Martin Neil Baily & Robert J. Gordon, 1988. "The Productivity Slowdown, Measurement Issues, and the Explosion of Computer Power," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 347-432.
  2. Erik J. Brynjolfsson & Thomas Malone & Vijay Gurbaxani & Ajit Kambil, 1991. "Does Information Technology Lead to Smaller Firms?," Working Paper Series 123, MIT Center for Coordination Science.
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