The effects of digitalization on production

Abstract

How does digitalization transform the macroeconomic production function? Using a model where firms can choose their technology, we find that sectors with more digital capital exhibit a higher elasticity of substitution between value added and intermediate inputs and between capital and labor. This shift in the elasticity of substitution is consistent with a higher complementarity of input-specific technologies on the technology frontier. We further show that the link between technological complementarity and digital intensity can be rationalized using a task-based approach. Out of the three types of digital capital, only the levels of information technology and software/databases have a significant impact on the production function, whereas communication technology has no effects. We also find that digital technical change in value added is Hicks-neutral.