Working Paper: CEPR ID: DP6109
Authors: Hans Peter Grüner
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.
Keywords: hierarchies; ICT; information processing; labour productivity; restructuring
JEL Codes: D23; D70; D83; L22; P51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ICT improvements (O30) | improved information processing (D83) |
| improved information processing (D83) | organizational restructuring (L22) |
| organizational restructuring (L22) | labor productivity (J24) |
| ICT improvements (O30) | labor productivity (J24) |
| ICT improvements + effective organizational restructuring (L86) | significant productivity gains (O49) |
| ICT improvements without appropriate restructuring (O30) | marginal productivity gains (O49) |