Organizing growth

We study the impact of information and communication technology on growth through its impact on organization and innovation. Agents accumulate knowledge through two activities: innovation (discovering new technologies) and exploitation (learning how to use the current technology). Exploitation requires the development of organizations to coordinate the work of experts, which takes time. The costs and bene…ts of such organizations depend on the cost of communicating and acquiring information. We …nd that while advances in information technology that lower information acquisition costs always increase growth, improvements in communication technology may lead to lower growth and even to stagnation, as the payo¤ to exploiting innovations through organizations increases relative to the payo¤ of new radical innovations. A …rst draft of this paper was prepared for the Conference in honor of Robert E. Lucas Jr. at Clemson University, September 2007. We thank Lorenzo Caliendo for excellent research assistance and Philip Aghion, Tim Besley, Per Krusell, Bob Lucas, Torsten Persson, Andrea Prat, Nancy Stokey and seminar participants at Chicago GSB, Clemson, ECARES, Erasmus School of Economics, LSE, Northwestern and Princeton for useful comments. Garicano acknowledges the …nancial support of the Toulouse Network on Information Technology. Rossi-Hansberg acknowledges the generous support of the Sloan Foundation.