Shocking Technology: What Happens When Firms Make Large IT Investments?

61 Pages Posted: 13 Apr 2019 Last revised: 18 Sep 2019

See all articles by James E. Bessen

James E. Bessen

Technology & Policy Research Initiative, BU School of Law

Cesare Righi

Boston University - School of Law - Technology & Policy Research Initiative

Date Written: April 12, 2019

Abstract

Many economists see information technology (IT) as central to understanding trends in productivity, labor’s share of output, and employment, especially as new “artificial intelligence” (AI) technologies emerge. Yet it has been difficult to measure its effects. This paper takes a first look at the economic impacts of large custom software investment by firms — “IT shocks.” Using a novel difference-in-differences methodology, we estimate the productivity of these shocks and the associated effects on revenues and employment and we explore the implications in terms of labor’s share and other variables, including heterogeneous relationships by industry, AI use, and time. In our preferred models, IT shocks increase firm productivity by about 5%, followed by increases in revenue of 11% and in employment of 7% on average. However, employment growth following IT shocks is small or negative in mature industries; also, it has been slower in recent years, reducing job reallocation and aggregate productivity growth. Also, labor’s share of revenue decreases and operating profits rise following IT shocks.

Keywords: Iinformation Technology, Artificial Intelligence, Firm Productivity, Employment Growth, Firm Growth, Labor Share, Markups

JEL Classification: D22, J21, O33

Suggested Citation

Bessen, James E. and Righi, Cesare, Shocking Technology: What Happens When Firms Make Large IT Investments? (April 12, 2019). Boston Univ. School of Law, Law and Economics Research Paper No. 19-6 (2019). Available at SSRN: https://ssrn.com/abstract=3371016 or http://dx.doi.org/10.2139/ssrn.3371016

James E. Bessen (Contact Author)

Technology & Policy Research Initiative, BU School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Cesare Righi

Boston University - School of Law - Technology & Policy Research Initiative ( email )

765 Commonwealth Avenue
Boston, MA MA 02215
United States

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