The Contribution of Information Technology to Consumer Welfare

Over the past decade, American businesses have invested heavily in information technology (IT) hardware. Unfortunately, it has been difficult to assess the benefits that have resulted. One reason is that managers often buy IT to enhance customer value in ways that are largely ignored in conventional output statistics. Furthermore, because of competition, firms may be unable to capture the full benefits of the value they create. This undermines researchers' attempts to determine IT value by estimating its contribution to industry productivity or to company profits and revenues. An alternative approach is to estimate the consumer surplus from IT investments by integrating the area under the demand curve for IT. This methodology does not directly address the question of whether managers and consumers are purchasing the optimal quantity of IT, but rather assumes their revealed willingness-to-pay for IT is an accurate indicator of their preferences. Using data from the U.S. Bureau of Economic Analysis, we estimate four measures of consumer welfare, including Marshallian surplus, exact surplus based on compensated (Hicksian) demand curves, a non-parametric estimate, and a value based on the theory of index numbers. Interestingly, all four estimates indicate that in our base year of 1987, IT spending generated approximately $50 billion to $70 billion in net value in the U.S. Our estimates imply that the value created for consumers from spending on IT is about three times as large as the amount paid to producers of TT equipment, providing a new perspective on the IT value debate.