The Price and Quantity of IT-Related Intangible Capital

Abstract: Complementary investments in the new skills and information practices that accompany IT investment may account for a significant fraction of value in IT-intensive firms, but the stock of this “IT-related intangible capital” (ITIC) as well as how the accumulation of this capital contributes to economic growth remains unmeasured. We use a) an extended firm-level panel on IT labor—a principal input into the construction of ITIC—along with b) Hall’s Quantity Revelation Theorem, which separates ITIC values into prices and quantities, to compute quantities (stocks) of IT-related intangible assets for a large panel of US firms from 1987 through 2010. Our estimates suggest steady growth in firms’ ITIC stock over the duration of the panel. We find that most of the IT-related market value destroyed by the dot-com bust was due to price fluctuations—ITIC stocks declined only slightly after 2001 but began rising again by 2004. ITIC formed about 20% of firms’ total assets by 2010. The use of firm level data allows us to document significant variation in the ITIC prices faced by different firms, as well as in the ITIC quantities accumulated by different firms. Finally, we embed our ITIC stock measures in firm-level productivity regressions and find that the output elasticity of ITIC is three times that of IT capital and that its estimated contribution to productivity is robust to controlling for differences in skill levels. Our findings suggest that ITIC accumulation plays a significant role in explaining differences in firm-level productivity in the information economy.