It is well-accepted that information technology (IT) has dramatically changed economic activity, but most research to date has focused on its most direct effects: the increase in firm-level or economy-wide productivity accruing from falling prices for computers and other IT hardware. This project focuses instead on asking how information technology has changed the organization of economic activity, as evidenced by the dramatic increase in IT outsourcing. Within that context the project addresses four questions. First, what are the productivity gains that firms experience from outsourcing their IT? Second, how does IT outsourcing affect product mix and prices at the firm level? Third, how has IT outsourcing affected industry dynamics (survival and failure, aggregate industry productivity)? And finally, what is the role of IT in mergers: how does it affect which firms merge, as well as post-merger success or failure?
The specific context for the study is the credit union industry. For the last fifteen years the National Credit Union Association has required all credit unions to report detailed information about their IT. A particularly useful aspect of the data is that it first reports whether the firm uses a manual or computerized system for its data processing. It then reports whether the firm uses an internally developed data processing system or contracts with an external vendor for the service. In principle, these two pieces of information (what we call the "IT choice") allow separate identification of computerization-related and outsourcing-related effects on productivity. This is useful in its own right, primarily because observing within-firm changes in IT choices is rare. More broadly, it allows a comparison of the productivity gains from reorganizing economic activity (outsourcing) to the more traditional gains from computerization and lower IT capital prices.
In addition to IT choices, the data contain vendor IDs and allow construction of variables describing IT industry structure. The data also contain standard firm-level characteristics such as size, output, inputs and costs and additional information about product mix (loan and saving offerings) and prices for those products. Overall this is a unique data set that can reveal much more about the causes and effects of IT outsourcing than has previously been known.
