Research Commentary—Information Technology Substitution Revisited
Authors: Zhang, Dawei; Cheng, Zhuo (June); Mohammad, Hasan A. Qurban H.; Nault, Barrie R.
Journal: Information Systems Research (2015)
<jats:p>Taking advantage of the opportunities created by the price adjusted performance improvement in information technology (IT) depends in part on the ability of IT capital to substitute for other inputs in production. Studies in the information systems literature and most economics training examining the substitution of IT capital for other inputs use the Allen elasticity of substitution (AES). We present a less-well-known measure for the elasticity of substitution, the Morishima elasticity of substitution (MES). In contrast to the AES, which is misleading when there are three or more inputs—such as non-IT capital, labor, and IT capital—the MES provides a substitution measure where the scale is meaningful, and the measure differs depending on which price is changing. This is particularly important for IT capital, because prices have been declining, and there is evidence that IT capital can substitute for non-IT capital or labor in a qualitatively different way than non-IT capital and labor substitute for each other. Methodologically, we also show the impact of imposing local regularity—for example, monotonicity of output from increases in inputs—which we do through Bayesian me…