NBER Reporter: Winter 2000/2001

Productivity and Technological Change

The NBER's Program on Productivity and Technological Change met at the Bureau's offices in Cambridge on December 1 to discuss "Technological Change and Institutional Structure." Manuel Trajtenberg, NBER and Tel Aviv University, organized the meeting and chose these papers for discussion:

Philippe Aghion, Harvard University; Christopher J. Harris, King's College, Cambridge; Peter Howitt, Brown University; and John Vickers, All Souls College, Oxford, "Competition, Imitation, and Growth with Step-by-Step Innovation"

Ricardo J. Caballero, NBER and MIT, and Mohamad L. Hammour, CEPR and Delta, "Creative Destruction and Development: Institutions, Crises, and Restructuring" (NBER Working Paper No. 7849)

George P. Baker, NBER and Harvard University, and Thomas N. Hubbard, NBER and University of Chicago, "Make versus Buy in Trucking: Asset Ownership, Job Design, and Information"

Erik Brynjolfsson, MIT, and Shinkyu Yang, New York University, "Intangible Assets and Growth Accounting: Evidence from Computer Investments"

Susan C. Athey and Scott Stern, NBER and MIT, "The Impact of Information Technology on Emergency Health Care Outcomes" (NBER Working Paper No. 7887)

Aghion, Harris, Howitt, and Vickers ask whether more intense market competition and imitation are good for growth. They use an endogenous growth model with "step-by-step" innovations, in which technological laggards must first catch up with the leading-edge technology before battling for technological leadership in the future. The authors find that the usual Schumpeterian effect of more intense product market competition (PMC) is almost always outweighed by the increased incentive for firms to innovate in order to escape competition; this means that PMC has a positive effect on growth. They also find that a little imitation almost always enhances growth, as it promotes more frequent neck-and-neck competition, but too much imitation unambiguously reduces growth. Thus, their model points to complementary roles for competition (antitrust) policy and patent policy.

Creative destruction, driven by experimentation and the adoption of new products and processes when investment is sunk, is a core mechanism of development. Generically, underdeveloped and politicized institutions are a major impediment to a well-functioning creative destruction process and result in sluggish creation, technological sclerosis, and spurious reallocation. Those ills reflect the macroeconomic consequences of contracting failures in the presence of sunk investments. Recurrent crises are another major obstacle to creative destruction. But Caballero and Hammour reject the common inference that increased liquidations during crises result in increased restructuring. Rather, they suggest that crises freeze the restructuring process, and this is associated with the tight financial-market conditions that follow. This productivity cost of recessions adds to the traditional costs of resource underutilization.

Both organizational economics and industrial organization seek to explain patterns of asset ownership in the economy. To that end, Baker and Hubbard develop a model of asset ownership in trucking. They test it by examining how the adoption of different classes of on-board computers (OBCs) from 1987 to 1997 influenced shippers to use their own trucks for hauls versus contracting with for-hire carriers. Baker and Hubbard find that OBCs' incentive-improving features pushed hauls toward private carriage, but their resource-allocation-improving features pushed them toward for-hire carriage. The authors conclude that ownership patterns in trucking reflect the importance of both incomplete contracts (Grossman and Hart, 1986) and job design and measurement issues (Holmstrom and Milgrom, 1994).

Brynjolfsson and Yang revise growth accounting methodology and address several puzzles regarding the rapid computer investments and the disappointing productivity performance after 1973 followed by the productivity surge of the late 1990s. They show that the computer-related portion of intangible investments is substantial and growing rapidly. In particular, the authors find that the magnitude of the intangible capital investments that accompany the computerization of the economy are far larger than the direct investments in computers themselves. The apparent productivity slowdown after 1973 may be in part an artifact of the omission of this capital accumulation from the national accounts. A revised estimate that takes the intangible investments into account indicates that the total factor productivity of the U.S. economy grew up to one percent per year faster during this period than previously estimated. If the ratio of intangible assets to computer investments has remained approximately constant, then the recent productivity surge may have been underestimated as well.

Athey and Stern analyze the productivity of technology and job design in emergency response (911) systems. During the 1990s, many systems adopted Enhanced 911 (E911) which used information technology to link automatic caller identification to a database of address and location information. Using data from Pennsylvania counties in 1994-6, when almost half of them experienced a change in technology, Athey and Stern analyze the health status of cardiac patients at the time of ambulance arrival; this should be improved by timely response. The authors find that E911 increases the short-term survival rates for patients with cardiac diagnoses by about one percent. They also find that E911 reduces hospital charges. Finally, the authors find that Emergency Medical Dispatching (EMD), where call-takers gather medical information, provide medical instructions over the telephone, and prioritize the allocation of ambulance and paramedic services, does not affect the E911 results. EMD and E911 are neither substitutes nor complements.

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