PARADOX LOST - FIRM-LEVEL EVIDENCE ON THE RETURNS TO INFORMATION-SYSTEMS SPENDING

The ''productivity paradox'' of information systems (IS) is that, desp ite enormous improvements in the underlying technology, the benefits o f IS spending have not been found in aggregate output statistics. One explanation is that IS spending may lead to increases in product quali ty or variety which tend to be overlooked in the aggregate statistics, even if they increase output at the firm-level. Furthermore, the rest ructuring and cost-cutting that are often necessary to realize the pot ential benefits of IS have only recently been undertaken in many firms . Our study uses new firm-level data on several components of IS spend ing for 1987-1991. The dataset includes 367 large firms which generate d approximately 1.8 trillion dollars in output in 1992. We supplemente d the IS data with data on other inputs, output, and price deflators f rom other sources. As a result, we could assess several econometric mo dels of the contribution of IS to firm-level productivity. Our results indicate that IS spending has made a substantial and statistically si gnificant contribution to firm output. We find that the gross marginal product (MP) for computer capital averaged 81% for the firms in our s ample. We find that the MP for computer capital is at least as large a s the marginal product of other types of capital investment and that, dollar for dollar, IS labor spending generates at least as much output as spending on non-IS labor and expenses. Because the models we appli ed were similar to those that have been previously used to assess the contribution of IS and other factors of production, we attribute the d ifferent results to the fact that our data set is more current and lar ger than others explored. We conclude that the productivity paradox di sappeared by 1991, at least in our sample of firms.