How do firms respond to cheaper computers? Microeconometric evidence for France based on a production function approach

Abstract

The continuous innovation process experienced by the information technology industries over the last decades has caused the price of computer power to decrease dramatically. This has led many firms to invest massively in increasingly efficient computers. This paper is an attempt to assess the impact of the fall of the cost of this particular input, on the performances of firms in terms of marginal cost, aggregate labor demand and employment by skill. Unlike most studies dealing with the technological bias issue, most of which rely on the estimation of factor demand equations, our evaluation of the complementarities between computers, skilled and unskilled labor rests on the sole estimation of a production function. We define a set of parameters of interest, depending on the observations and on the structural parameters of the production function, enabling us to examine the impact of the computer price decrease on marginal cost, labor demand and the relative demand for skills. Using a panel of more than 5000 continuing French firms followed between 1994 and 1997, we estimate a translog production function and find that the effects of the decrease in the price of computers have been large, both in terms of marginal cost reduction and in terms of skill structure. A 15% fall of the computer price should lead to a decrease of around 0.7% in the marginal cost of production and to a rise of about 3.5% of the skilled to unskilled ratio, other input prices being held fixed.Computers, production function, marginal cost, factor demands, technological bias