How does information technology improve aggregate productivity? A new channel of productivity dispersion and reallocation

Using U.S. firm-level data from 1971 to 2000, this paper quantifies the importance of production input reallocation in explaining the information technology (IT) driven productivity growth. We find that cross-industry variation in input reallocation explains more than 30% of differences in the 5-year productivity growth rates of industries utilizing similar levels of IT. Our findings illustrate a new channel through which IT affects the aggregate productive growth and are consistent with recent papers that emphasize the destructive nature of technology innovation and the importance of firm-level reallocation in explaining aggregate productivity growth. Our paper implies that policy makers should focus not only on implementing IT but also on instituting policies aimed at improving reallocation efficiency to maximize the effect of IT on the productivity growth.