IT Productivity and Aggregation using Income Accounting

Introduction We examine the relationship between the Cobb-Douglas production function that is frequently used in information technology (IT) productivity studies and the income accounting identity. In doing so we evaluate the impact of this relationship on the question about aggregation from firm-level data to industry-level data when estimating IT productivity, that is, whether industry-level estimates are meaningful. In addition we examine whether the income accounting identity can help explain elements of total factor productivity (TFP) – information that is not contained in the output elasticities of the inputs after estimating a production function.