The Contribution of Information Technology to Consumer Welfare

Over the past two decades, American businesses have invested heavily in information technology (IT) hardware. Managers often buy IT to enhance customer value in ways that are poorly measured by 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 estimates the consumers' 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 accurately reflects their valuations. Using data from the U.S. Bureau of Economic Analysis, we estimate four measures of consumers' surplus, including Marshallian surplus, Exact surplus based on compensated (Hicksian) demand curves, a “nonparametric” 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 United States and increased economic growth by about 0.3% per year. According to our estimates, which are likely to be conservative, IT investments generate approximately three times their cost in value for consumers.