The Productivity Paradox: The Role of Quality and Technology Type in the Investment Decision

Many researchers have noted that large information technology (IT) investments in the United States have not been accompanied by gains in productivity. This phenomenon has been termed the "productivity paradox". The assumption underlying this paradox is that IT should enable individuals and organizations to become more productive. The purpose of this paper is to provide insight into the results of some of the widely cited studies on the productivity paradox. In particular, we examine the conditions under which organizations should not expect investments in IT to lead to productivity gains. In fact, there are times when companies should invest in technology that will decrease overall productivity, because doing so will increase organizational profits. In the model we developed, a profit maximizing, rather than a productivity maximizing, monopolist chooses the quality (i.e. performance, features, etc.) and the price for a single product. We show how the impact of IT on the profitability and productivity of the monopolist depends on the type of technology implemented in the firm. For example, automation of overhead tasks always improves both profits and productivity, but technological tools which enhance the capabilities of workers can result in improved profits yet lower productivity. Several implications for both managers and researchers are also discussed. 3 "We see computers everywhere except in the productivity statistics." – Robert Solow