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Paradox Lost? Firm-level Evidence of High Returns to Information Systems Spending


  • Erik Brynjolfsson
  • Lorin Hitt


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 aggregate output statistics, even if they increase sales 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 have made a substantial and statistically significant contribution to firm output. We find that between 1987 and 1991, gross return on investment (ROI) for computer capital averaged 81% for the firms in our sample. We find that the ROI for computer capital is greater than the return to other types of capital investment and that IS labor spending generates several times as much output as spending on non-IS labor and expenses. Because the models we applied were essentially the same as 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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  • Erik Brynjolfsson & Lorin Hitt, 1997. "Paradox Lost? Firm-level Evidence of High Returns to Information Systems Spending," Working Paper Series 162, MIT Center for Coordination Science.
  • Handle: RePEc:wop:mitccs:162

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    References listed on IDEAS

    1. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-1158, December.
    2. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August.
    3. Siegel, Michael D. & Madnick, Stuart E., 1991. "Context interchange : sharing the meaning of data," Working papers 3356-91. CIS (Series) (Sl, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Brynjolfsson, Erik., 1991. "An incomplete contracts theory of information, technology and organization," Working papers #126. Working paper (Sloa, Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    Cited by:

    1. Onyeiwu, Steve, 2002. "Inter-Country Variations in Digital Technology in Africa: Evidence, Determinants, and Policy Applications," WIDER Working Paper Series 072, World Institute for Development Economic Research (UNU-WIDER).
    2. David, P.A., 2000. "Understanding Digital Technology's Evolution and the Path of Measured Productivity Growth: Present and Future in the Mirror of the Past," Papers 99-011, United Nations World Employment Programme-.

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