Week 9_Pang, Tafti, and Krishnan (2014)_Yaeeun Kim

The authors examined whether IT improves administrative efficiency in U.S. state governments. This empirical study contributes to the IS literature by expanding the scope of IT value research to the public sector.

To be specific, U.S. state governments spent approximately 5% of the tax revenues in IT in 2004. On the other hand, for-profit firms used 3.6% of the sale revenue on IT in 2004. This fact enhances the necessity for policy makers to keep their eyes on the IT spending in public organizations. Two important factors motivated the authors to study: 1) the public sector is different from the private business context, and 2) the approach to measure the value effect of IT investments in the private sector may not be appropriate in the government context. In particular, for-profit context uses production function framework, but the public sector context is more suitable to use cost function.

For the analysis, the authors estimated the impact of IT investments on administrative efficiency with a two-stage estimation approach based on a multi-product translog cost function. In the first stage, they estimated cost inefficiency with a stochastic frontier model, and in the second stage, the estimated cost inefficiency was regressed on IT intensity and other exogenous factors by reflecting on the fact that the government outputs are exogenously given. As government agencies are expected to deliver necessary public service within a budget collected from tax, efficiency benefits of IT is more applicable in the public sector context than adopting the effect of IT on costs of goods sold. The applicable area of cost efficiency is not limited to human resources but opens to services, which is affected by automating organizational process by focusing on the automate and informate roles of IT.