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Understanding IT Productivity Paradox

The document discusses the productivity paradox of information technology. [1] It presents four potential explanations for why econometric estimates have shown low IT capital productivity: [2] mismeasurement of outputs and inputs due to difficulties in developing accurate price deflators and measuring IT stock; [3] lags in realizing benefits from IT due to learning curves and adjustment periods; [4] redistribution of profits across firms rather than overall economic growth; and [4] potential mismanagement of information and technology resources within organizations. The conclusion is that while IT allows new innovations, its full value remains difficult to measure due to challenges in documentation and metrics.

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Reshma Majumder
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153 views6 pages

Understanding IT Productivity Paradox

The document discusses the productivity paradox of information technology. [1] It presents four potential explanations for why econometric estimates have shown low IT capital productivity: [2] mismeasurement of outputs and inputs due to difficulties in developing accurate price deflators and measuring IT stock; [3] lags in realizing benefits from IT due to learning curves and adjustment periods; [4] redistribution of profits across firms rather than overall economic growth; and [4] potential mismanagement of information and technology resources within organizations. The conclusion is that while IT allows new innovations, its full value remains difficult to measure due to challenges in documentation and metrics.

Uploaded by

Reshma Majumder
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

THE PRODUCTIVITY PARADOX

OF INFORMATION TECHNOLOGY

SEC – B
GROUP 8
A B H I N AV T R I PAT H I
RESHMA MAJUMDAR
MANISHA TOPPO
S U S M I TA S A H U 1
Productivity Paradox

Productivity is the fundamental economic measure of a technology's contribution


Econometric estimates have also indicated low IT capital productivity in a variety of
manufacturing and service industries

Four Explanations for the Paradox

Mismanagement of
Mismeasurement of Lags due to learning Redistribution and
information and
outputs and inputs and adjustment dissipation of profits
technology

2
Mismeasurement of outputs and inputs

 Explanation for the low measured productivity of IT is simply that output is not being measured
correctly

 Measurement errors need not necessarily bias IT productivity if they exist in comparable magnitudes
both before and after IT investments

Output Mismeasurement – When comparing two output levels, it is important to deflate the prices so they
are in comparable "real" dollars

 Measurement problem arises from the difficulty of developing accurate, quality adjusted price deflators

Input Mismeasurement - If the quality of work life is improved by computer usage, then theory suggests
that proportionately lower wages can be paid

 Measurement issue is how to measure IT stock itself

3
Lags due to learning and adjustment

 Explanation forthe paradox is that the benefits from IT can take several years to show results, on the
"bottom line“

 Existence of lags has some basis in theory because of its unusual complexity and novelty, firms and
individual users of IT may require some experience before becoming proficient

 Models of learning-by-using the optimal investment strategy sets short term marginal costs greater
than short-term marginal benefits

Redistribution and dissipation of profits

 Explanation is that IT may be beneficial to individual firms, but unproductive from the standpoint
of the industry as a whole or the economy as a whole: IT rearranges the shares of the pie without
making it any bigger

 IT may be used disproportionately for market research and marketing, activities which can be
very beneficial to the firm while adding nothing to total output
4
Mismanagement of information and technology

IT really is not productive at the firm level

IT might increase organizational slack instead of output or profits

Argument by Roach that manufacturing has made better use of IT than has the service sector because manufacturing faces
greater international competition, and thus tolerates less slack

It can be explained formally by models such as agency theory and evolutionary economics, which treat the firm as a more
complex entity

Conclusion

 IT will not so much help us produce more of the same things as allow us to do entirely new things in
new ways

 The value of IT has not yet been widely documented--the one certainty is that the measurement
problem is becoming more severe
5
THANK YOU

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