Fox MIS Professor Proves That IT Dollars Aid Government Efficiency

Min-Seok-PangWhen is it a good idea for state governments to spend more tax dollars? When that money goes to information technologies, it turns out.

Min-Seok Pang, Ph.D., Assistant Professor of Information Systems, Fox School of Business, is a self-proclaimed “news and political junkie.”  That interest lead to a question: what is the value of IT in the public sector? While there has been extensive research on the fiscal value of information technologies in the business sector for the last couple of decades, little has been done about evaluating the way in which government spending on IT affects or improves services or efficiencies.

In the business world, the research has demonstrated that more investment in IT leads to improvement in firm performance in terms of productivity, profitability, or market value. But, in the public sector there was only anecdotal evidence illustrating that the correct use and implementation of information systems in public organizations could save taxpayers’ money, for instance, by digitizing business processes, which can save time, or improving transparency of an administration.

Pang and co-authors Dr. M.S. Krishnan, University of Michigan, and Dr. Ali Tafti, University of Illinois, Chicago, first compared all 50 states to see which was most efficient, measuring efficiency by looking at how much money various states spend to produce the same level of government services. They then looked at the level of IT spending to calculate the cost savings.  Finally, they compared spending data, from 2001-2004, from 44 U.S. state governments.

If one state spends more money to produce the same amount of government services than other states, that state is less efficient than others. I found that the more tax revenues a state government spends in information technologies, the more efficient it is.

How efficient? An additional $1 investment in IT made by a state’s chief information officer (CIO) leads to a savings of $1.13 in the state’s administrative costs, in terms of operational expenses and capital deprecation. Somewhat surprisingly, the savings was highest in rural areas. “Cost savings from $1 IT investments are larger when a state is more rural. But it does make sense – if a state is more rural, it has to maintain more state government offices and operations in remote locations (a DMV office for example). Providing government services via the Internet can save costs for both rural residents and state governments.” Pang said.

Pang’s research is one of the first rigorous scientific studies with a large-scale dataset that measure returns on IT investments in governments. With declining tax revenues and mounting budget deficits, some public-sector organizations have scaled back their investments in IT in recent years.  Pang’s study shows that it is not a wise move. He believes that government IT officials can use the study to convince taxpayers and their representatives that IT investments generate sufficient returns to the public to justify needed, strategic, spending on IT.  

Pang, M.-S., Tafti, A., and Krishnan, M.S. (2014) “Information Technology and Administrative Efficiency in U.S. State Governments – A Stochastic Frontier Approach,” MIS Quarterly (38:4) pp. 1079-1101.

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