Technology adoption costs and productivity growth: The transition to information technology

Using two panels of U.S. manufacturing industries, this paper estimates capital adjustment costs from 1961 to 1996. I find that from 1974-1983 adjustment costs rose sharply-they more than doubled from about 3% of output to around 7%. Moreover, this increase is specifically associated with a shift to investment in information technology. But such large adoption costs imply that the Solow residual mismeasures productivity growth: Adoption costs are resource costs representing an unmeasured investment. I find that when this investment is included, productivity grew about 0.4% per annum faster than official measures during the 1970's and early 1980's, reducing the size of the productivity slowdown. Indeed, estimated productivity growth rates were roughly the same from 1974-1988 as from 1949-1973. Thus technology transitions critically affect productivity growth measurement. (C) 2002 Elsevier Science (USA).