The IT Revolution and Italy’s Two Lost Decades (with Tom Schmitz)

Abstract:

Since the middle of the 1990s, real GDP per worker has been growing much more slowly in Italy than in other developed countries. In this paper, we analyze how much the IT Revolution has contributed to this divergence. Firm-level evidence shows low adoption and unproductive use of IT in Italy, and suggests that this is due to inefficient management practices. To analyze the quantitative importance of these phenomena, we build a general equilibrium model with heterogeneous firms and workers, migration, management and IT adoption choices. We use this model to compare two countries, Italy and Germany, which we assume differ only in their level of management efficiency. Our calibrated model, disciplined by the firm-level evidence, suggests that the growth triggered by the IT Revolution in Italy represents only around XX% of the corresponding figure for Germany. Therefore (depending on the assumptions regarding the aggregate impact of IT in Germany), the IT Revolution is responsible for between XX% and XX% of the divergence in Italy’s and Germany’s GDP per worker between 1995 and 2015. In Italy, lower management efficiency has limited the productivity gains from IT and become a more salient problem as IT increased the aggregate importance of managers. It has also limited the wage increases of high-skilled workers, and therefore pushed more of them to emigrate.