Measuring the value of information technology in technical efficiency with stochastic production frontiers

With the vast amounts of resources being invested in information technology (IT), the issue of how to measure and manage the impact of IT on organizational performance has received increased attention. Based on the production theory in microeconomics, this paper investigates the relationship between IT investments and technical efficiency in the firm's production process. The application of stochastic production frontiers to a comprehensive firm-level panel data set provides us with empirical evidence that IT has a significantly positive effect on technical efficiency and, hence, contributes to the productivity growth in organizations, claimed by some earlier studies with the same data set. The stochastic production frontiers considered include the popular Cobb-Douglas function and the more flexible translog function. Both specifications of production technology lead to the same conclusion. Managerial implications derived from the empirical results are also presented.