NESIS Productivity and Competitiveness in the New Information Economy

1. NESIS Productivity and Competitiveness in the New Information Economy 26 – 27 June 2003, ISTAT, Rome Investigating the Productivity Paradox Marco Alderighi CERTeT - Bocconi University

2. 2 Introduction • Starting Point: • The Solow Paradox: we see computers everywhere but in the productivity statistics • Aim: • Theoretically explain why it is difficult to measure the impact of ICT and why the impact of ICT could be underestimated. • Main points: • Conceptually separate: • the ICT adoption (that does not increase the output) from • ICT use (that increases the output) • Explain why firms adopt ICT and then they do not use • Show that measuring correlation between ICT adoption and productivity is misleading. Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

3. 3 Literature Review • Econometric studies: • ’80 – early ’90: Productivity Paradox: Stassmann (90) Loveman (94), Barau et al (91), Morrison and Berndt (90), Roach (84), Panko (91) • ’90: The Solow Paradox (partially) solved: Wolff(99), Diewert & Fox (99): error measurements; Brynjolfsson & Hitt (96), Bharadway et al (99): flexibility, varieties, etc..; Gera et al. (99); Lehr_Licktenberg (99): TFP vs LFP, Siegel (94) quality improvements; Tripett (99): various; • Theoretical explanations: • David (90): Leaning Process; Oliner & Sichel (93): Small share; Lillrank et al (02) Customer Satisfaction & Option Value; Zagler (93): gains no within but between firms, Belleflamme (01): product differentiation; Alderighi (03): Adoption vs Use Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

4. 4 The Model (i) • Principal-agent model - the agent has private information on his ICT skills • New Points: • adoption per se is not effective, use is effective • the investment is an upper bound of the work the agent can do • Principal cannot offer a contract including the investment decision • A. – B. affect the technology: • Technology : and (the output depends on the use, but the use can not be larger than the investment) • = Output = Usage = Investment in ICT Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

5. 5 The Model (ii) C. affects the structure of the contract and the timing of the problem Case 1: complete information (Benchmark case) Case 2: incomplete information with Contractible investment Case 3: incomplete information Without contractible investment Agent’s utility : Principal’s Utility: = skills, private information of the agent with cdf and pdf: , (note: means high skills, means no skills) = effort function, is increasing in (the more the knowledge the lower the effort), and increasing in (the higher the use, the higher the effort) = transfer Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

6. 6 The Model (iii) Timing 1. Nature determines 2. Agent knows 3. Principal chooses and offers a contract to the agent 4. The agent accepts or rejects the contract Benchmark case 2’. also the principal knows Without contractible investment 3’. the principal cannot offer a contract including the investment decision Contractible investment 3’. the principal can offer a contract including the investment decision Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

7. 7 Case 1: Benchmark Case Principal’s maximization problem: First order conditions: Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

8. 8 Case 2: Contractible Investment Principal’s maximization problem: First order conditions: Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

9. 9 Case 3: Without Contractible Investment Principal’s maximization problem: First order conditions: Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

10. 10 Results for B, C Both in Benchmark case and in Contractible case the investment decision coincides with the use decision ( ). High skilled workers perform high usage of ICT, produce more and are paid more than low skilled workers. Due to the incentive issue, in the Contractible case there is “under investment and under use” with respect to the Benchmark case. Investment Use Transfer high skilled low skilled Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

11. 11 Results for W Without Contractible Investment, investment decision does not depend on the skills (because it is preceding) Investment decision does not coincide with the use decision ( ). Agents with lower skills accept an incentive contract ( ) Agents with higher skills accept a flat contract ( ) flat contract incentive contract Investment Use Transfer high skilled low skilled Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

12. 12 Correlation between Investment and Output B and C: Benchmark case and Contractible case Perfect correlation between Output and Investment Since and implies W: Without Contractible investment case Low correlation between Output and Investment There is full correlation for high skilled workers Since and implies but no correlation for low skilled workers Since but implies Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

13. 13 Simulation Simulated Model Draws: 100.000 for each . is uniformly distributed in is uniformly distributed in Results: the correlation depends on the costs of the ICT investment Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003

14. 14 Conclusions • Incomplete information without contractible investments • adoption per se is not effective, use is effective • the investment is an upper bound of the work the agent can do • Principal cannot offer a contract including the investment decision • then • even if there is a full correlation between Output and Use • there is a weak correlation between Output and Investment • the correlation between Output and Investment decreases when the costs of ICT investment are decrease. Bocconi University - CERTeT NESIS Workshop 26 – 27 June 2003