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Examining the Contribution of Information Technology Toward Productivity and Profitability in U.S. Retail Banking

  • Baba Prasad
  • Patrick T. Harker
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    There has been much debate on whether or not the investment in Information Technology (IT) provides improvements in productivity and business efficiency. Several studies both at the industry-level and at the firm-level have contributed differing understandings of this phenomenon. Of late, however, firm-level studies, primarily in the manufacturing sector, have shown that there are significant positive contributions from IT investments toward productivity. This study examines the effect of IT investment on both productivity and profitability in the retail banking sector. Using data collected through a major study of retail banking institutions in the United States, this paper concludes that additional investment in IT capital may have no real benefits and may be more of a strategic necessity to stay even with the competition. However, the results indicate that there are substantially high returns to increase in investment in IT labor, and that retail banks need to shift their emphasis in IT investment from capital to labor.

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    File URL: http://fic.wharton.upenn.edu/fic/papers/97/9709.pdf
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    Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 97-09.

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    Date of creation: Mar 1997
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    Handle: RePEc:wop:pennin:97-09
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    1. Benston, George J & Hanweck, Gerald A & Humphrey, David B, 1982. "Scale Economies in Banking: A Restructuring and Reassessment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 435-56, November.
    2. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc.
    3. Brynjolfsson, Erik. & Hitt, Lorin M., 1995. "Paradox lost? : firm-level evidence on the returns to information systems spending," Working papers 3786-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Catherine J. Morrison & Ernst R. Berndt, 1991. "Assessing the Productivity of Information Technology Equipment in U.S. Manufacturing Industries," NBER Working Papers 3582, National Bureau of Economic Research, Inc.
    5. Frank R. Lichtenberg, 1993. "The Output Contributions of Computer Equipment and Personnel: A Firm- Level Analysis," NBER Working Papers 4540, National Bureau of Economic Research, Inc.
    6. Mester, Loretta J, 1987. " A Multiproduct Cost Study of Savings and Loans," Journal of Finance, American Finance Association, vol. 42(2), pages 423-45, June.
    7. Darrell Parsons & Calvin Gotlieb & Michael Denny, 1993. "Productivity and computers in Canadian banking," Journal of Productivity Analysis, Springer, vol. 4(1), pages 95-113, June.
    8. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, June.
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