Discussion Paper Details

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Title: Information Technology, Efficient Restructuring and the Productivity Puzzle

Author(s): Hans Peter Grüner

Publication Date: February 2007

Keyword(s): hierarchies, ICT, Information processing, labour productivity and restructuring

Programme Area(s): Industrial Organization and International Macroeconomics

Abstract: Labour productivity in the US has recently grown more strongly than in most European countries. It is often argued that the American productivity increase is due to the widespread introduction of new information and communication technologies (ICT). But why have the same technologies not similarly increased Europe's labour productivity? This paper provides a theoretical explanation for this productivity puzzle based on an extension of Radner's (1992) model of hierarchical information aggregation. The introduction of new ICTs enables organizations to process any given amount of information with a shorter delay. This enables organizations to restructure and solve incentive problems without risking excessive delay. Even a marginal improvement in the ICT can yield significant increases in labour productivity if - and only if - the organization is drastically restructured. Restructuring yields hierarchies with fewer layers and fewer managers, all working under incentive pay and providing first best effort. However, managers need not participate in the gains associated with the restructuring of their business firms.

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Bibliographic Reference

Grüner, H. 2007. 'Information Technology, Efficient Restructuring and the Productivity Puzzle'. London, Centre for Economic Policy Research.