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The effects of digitalization on production

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  • Schwark, Florentine
  • Tryphonides, Andreas

Abstract

How does digitalization transform the macroeconomic production function? Using a model where firms can choose their technology, we find that sectors with more digital capital exhibit a higher elasticity of substitution between value added and intermediate inputs and between capital and labor. This shift in the elasticity of substitution is consistent with a higher complementarity of input-specific technologies on the technology frontier. We further show that the link between technological complementarity and digital intensity can be rationalized using a task-based approach. Out of the three types of digital capital, only the levels of information technology and software/databases have a significant impact on the production function, whereas communication technology has no effects. We also find that digital technical change in value added is Hicks-neutral.

Suggested Citation

  • Schwark, Florentine & Tryphonides, Andreas, 2025. "The effects of digitalization on production," European Economic Review, Elsevier, vol. 171(C).
    • Handle: RePEc:eee:eecrev:v:171:y:2025:i:c:s0014292124002253
    DOI: 10.1016/j.euroecorev.2024.104896
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    More about this item

    Keywords

    Digitalization; Elasticity of substitution; Productivity; Endogenous technology choice; Technology frontier; Task-based production;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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